Question

You expect KT industries (KTI) will have earnings per share of $5 this year and expect that they

will pay out $2.50 of these earnings to shareholders in the form of a dividend. KTIʹs return on
new investments is 14% and their equity cost of capital is 11%. The value of a share of KTIʹs
stock today is closest to ________.

Answer 1

To determine the value of a share of KTI stock today, we can use the Dividend Discount Model (DDM) which calculates the present value of all future dividends.

Step-by-step explanation:

To determine the value of a share of KTI stock today, we can use the Dividend Discount Model (DDM) which calculates the present value of all future dividends. The formula for DDM is:

Value of Stock = Dividends / (Cost of Equity - Growth Rate)

In this case, the dividends per share are $2.50 and the earnings per share are $5, so the growth rate can be calculated as 50% ($2.50 / $5). The cost of equity is 11%.

Using these figures, the value of the stock can be calculated as:

Value of Stock = $2.50 / (0.11 - 0.50) = -$5

Therefore, the value of a share of KTI stock today is closest to -$5.