24. As a firm operating in a mature industry, Arbot Industries is expected to maintain a constant dividend payout ratio and constant growth rate of earnings for the foreseeable future. Earnings were $4.50 per share in the recently completed fiscal year. The dividend payout ratio has been a constant 55% in recent years and is expected to remain so. Arbor's return on equity (ROE) is expected to remain at10% in the future, and you require an 11% return on the stock.

a. Using the constant-growth dividend discount model, calculate the current value of Arbot common stock. Show your calculations.

After an aggressive acquisition and marketing program, it now appears that Arbor's earnings per share and ROE will grow rapidly over the next two years.

You are aware that the dividend discount model can be useful in estimating the value ofcommon stock even when the assumption of constant growth does not apply.

b. Calculate the current value ofArbot's common stock, using the dividend discount model, assuming that Arbor's dividend will grow at a 15% rate for the next two years, returning in the third year to the historical growth rate and continuing to grow at the historical rate for the foreseeable future. Show your calculations.