Final answer:
To calculate the current stock price, we use the present discounted value formula to determine the present value of future dividend payments. By calculating the present value of each dividend payment and adding them together, we find that the current stock price is $12.14.
Step-by-step explanation:
To calculate the current stock price, we need to determine the present value of future dividend payments. We can use the present discounted value (PDV) formula to calculate this. First, we calculate the present value of each dividend payment using the discount rate. The present value of the dividend in one year is $7.07 / (1 + 0.11) = $6.37. Then, we calculate the future dividends using the growth rate. The dividend in two years is $7.07 * (1 + 0.02) = $7.22. Finally, we calculate the present value of the future dividends using the discount rate.
The present value of the dividend in two years is $7.22 / (1 + 0.11)^2 = $5.77. Now, we can add the present values of the dividends to get the present value of all future dividends: $6.37 + $5.77 = $12.14. Therefore, the current stock price is $12.14.