Final answer:
To determine the stock price with a dividend of $7.4, growth of 2.8%, and required return of 21%, the Gordon Growth Model gives the price of $41.80, which corresponds to option D.
Step-by-step explanation:
The question is about determining the price of a stock given a recent dividend, an expected long-run growth rate, and an investor's required rate of return. To find this, we use the Gordon Growth Model, which calculates the price of a stock by dividing the next expected dividend by the difference between the required rate of return and the growth rate. Here, the next expected dividend is calculated as the most recent dividend multiplied by one plus the growth rate (since the dividend has just been paid and therefore, the next expected dividend will be inclusive of growth).
So the calculation is as follows:
D1 = D0 × (1 + g) = $7.4 × (1 + 0.028) = $7.4 × 1.028
P0 = D1 / (k - g) = ($7.4 × 1.028) / (0.21 - 0.028) = $7.6052 / 0.182 = $41.80
Therefore, the correct answer is D. $41.80.