Final answer:
To calculate the present value of Ray's Hardware stock, which pays a dividend with growth, apply the Gordon Growth Model, yielding a price of $74.74, matching option B.
Step-by-step explanation:
The question is related to finding the present value of Ray's Hardware stock, assuming the stock will pay a dividend of $3.55 per share next year and increase that dividend by 3.25 percent per year indefinitely. If you require a return (discount rate) of 8 percent on your investment, you would use the Gordon Growth Model (also known as the Dividend Discount Model) to calculate the stock's present value. The Gordon Growth Model formula is P = D / (r - g), where P is the current stock price, D is the dividend next year, r is the required rate of return, and g is the growth rate of dividends.
Using the information provided, D = $3.55, r = 0.08 (or 8% as a decimal), and g = 0.0325 (or 3.25% as a decimal). Plugging these into the formula gives P = $3.55 / (0.08 - 0.0325) = $3.55 / 0.0475. Upon calculating further, P = $74.7368, which can be rounded to $74.74 when rounded to two decimal places.
Thus, if you require an 8 percent return on your investment, you should be willing to pay $74.74 for Ray's Hardware stock today, which corresponds to option B in the multiple-choice answers provided.