Answer:
the intrinsic value of the stock is 42.97
If the stock is priced at 40 dollars it would be a good idea to purchase the share as will provide a better yield than the cost of capital of 9.6%
Explanation:
First, we solve for the cost of equity using the CAPM:
 
 
risk free =	0.03
market rate =	0.09
premium market = (market rate - risk free) = 0.055
beta(non diversifiable risk) = 1.2
 
 
Ke = 0.09600
<em>Now we solve for the intrinsic price using the gordon model</em>
<em>with multi-stage growth:</em>
First, we calcualte the future dividends
 grow rate	Dividends
0                1.25
1	0.25       1.5625
2	0.25       1.953125
3	0.25       2.44140625
4	0.25       3.051757813
4	0.03     3.143310547
Now in the last year, we calcualte using the gordon model or constant grow:

32.7128182
Now we calculate and add together the present value of each of this future cash flow to determnate the intrinsic  value ofthe share:

 Present Value
1	1.5625 / (1+0.096)^1     =  1.425638686
2	1.953125 / (1+0.096)^2 = 1.625956531
and so on, giving the following values:
3	1.854421226
4	2.114987712
present value of the future dividends at 3% 22.67126448
<u>Finally we add them and get:</u>
42.97160726