Final answer:
Using the Gordon Growth Model with the provided dividend, required rate of return, and growth rate, the current stock price is calculated to be approximately $25.49.
Step-by-step explanation:
The current stock price can be determined using the Gordon Growth Model, which is used for valuing a stock that pays constant dividends and grows at a constant rate. The formula for calculating the stock price (P0) is P0 = D1 / (rs - g), where D1 is the dividend next year (D0 * (1 + g)), as is the required rate of return, and g is the growth rate of the dividend.
To find the current stock price, we will use the provided values: D0 = $1.25, rs = 9.1%, and g = 4%. The next year's dividend, D1, would thus be $1.25 * (1 + 0.04) = $1.30. Plugging the values into the Gordon Growth Model formula gives us P0 = $1.30 / (0.091 - 0.04) = $1.30 / 0.051, which equals approximately $25.49.