As an Electric Utility, Arbot Industries Is Expected to Maintain

question 39

Essay

As an electric utility, 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. In recent years, the dividend payout ratio has been a constant 65% and is expected to remain so. Arbot's return on equity (ROE) is expected to be 14% in future years. Assume your required return on the stock is 8.5%. Based on the constant growth model, what is Arbot's intrinsic value?

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Definitions:

Straight-Line Depreciation

A method of allocating the cost of a tangible asset over its useful life in equal annual amounts, making it the simplest depreciation method.

After-Tax Discount

The reduction in price or value of an item after taxes have been factored into its cost.

Income Tax Rate

The percentage of income that is paid to the government as tax. It can vary depending on the income level and jurisdiction.

Straight-Line Depreciation

An approach to spreading out the expense associated with a long-term asset evenly over the period it is expected to be used.