Answer: undervalued.

**Explanation:** To determine if the stock is undervalued, fairly valued, or overvalued using the Gordon growth model, we need to calculate the justified P/E ratio and compare it to the actual trailing P/E ratio. **Step 1: Calculate the dividend payout ratio** - Retention rate = 45% - Dividend payout ratio = 1 - Retention rate = 1 - 0.45 = 0.55 or 55% **Step 2: Calculate the justified trailing P/E ratio using the Gordon growth model** The formula for justified trailing P/E is: \[ \text{Justified P/E} = \frac{\text{Payout ratio} \times (1 + g)}{r - g} \] Where: - Payout ratio = 0.55 - g = 4.0% = 0.04 - r = 8.8% = 0.088 \[ \text{Justified P/E} = \frac{0.55 \times (1 + 0.04)}{0.088 - 0.04} = \frac{0.55 \times 1.04}{0.048} = \frac{0.572}{0.048} = 11.92 \] **Step 3: Compare justified P/E with actual P/E** - Justified P/E = 11.92 - Actual trailing P/E = 13.9 Since the actual P/E (13.9) is higher than the justified P/E (11.92), the stock is **overvalued** according to the Gordon growth model. Therefore, the correct answer is **C**.

Author: LeetQuiz Editorial Team