Final answer:
The stock's current price can be calculated using the dividend discount model (DDM), which considers the dividend, required rate of return, and expected growth rate. By substituting the given values into the DDM formula, we find that the stock's current price is $9.38.
Step-by-step explanation:
To calculate the stock's current price, we can use the dividend discount model (DDM). The DDM formula is:
Stock Price = Dividend / (Required Rate of Return - Expected Growth Rate)
Using the given information, the dividend is $0.75, the required rate of return is 10.5%, and the expected growth rate is 2.5%.
Substituting these values into the formula:
Stock Price = $0.75 / (0.105 - 0.025) = $9.38
Therefore, the stock's current price is $9.38.
Therefore, the calculated value for the stock's current price is $9.60625. Now, we need to round this to the nearest cent, so the answer is approximately $9.61.
Now, let's compare this result to the given options:
a. $7.88
b. $6.38
c. $9.38
d. $7.13
e. $8.63
The closest match to our calculated value of $9.61 is option (c) $9.38.
Therefore, based on the Gordon Growth Model, the stock's current price is estimated to be $9.38. It's important to note that this is a simplified model, and actual stock prices may be influenced by various other factors in real-world financial markets.