Question

You expect KT Industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The expected growth rate for KTI's dividends is closest to:

Answer 1

7.50%

Step-by-step explanation:

Expected earning per share = $3

Expected dividend per share (D1) = $1.50

Return on new investment (ROE) = 15%

Equity cost of capital = 12%

Dividend payout ratio = Expected dividend ÷ Expected earning per share

= 1.5 ÷ 3

= 0.5

Expected growth rate = ROE (1 - Dividend payout ratio)

= 15% × (1 - 0.5)

= 7.50%