Orange, a local cellular phone company plans to roll out a new product for the holiday season. This product line is expected to capture a significant share of the market for the next 2 years. Afterward, due to increased competition, its free cash flows are expected to flatten out. Orange has just paid a cash dividend of $1.00 and is expected to increase its dividend payout by 15% for the next two years. Beginning the third year and thereafter, it plans to pay the same dividend that it paid in year two (a constant dividend). Orange common stock is expected to have a beta coefficient of 3.2 and the S&P 500 (overall market) is expected to yield a return of 8% in the foreseeable future. If the Federal Reserve Bank is able to reach its inflation target of 2% and the risk-free rate of interest is brought down to an acceptable level of 4%,

a. (8 pts) What is the intrinsic value of Orange's common stock today?

b. (2 pts) If the market value of Orange is $25/share today, should it be purchased? Explain.