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

The value of a share of KTI's stock today can be calculated using the dividend discount model (DDM) formula, which takes into account the expected dividends and the equity cost of capital.

Step-by-step explanation:

To determine the value of a share of KTI's stock today, we need to calculate the present value of both the dividends and the expected stock price. The present value of the dividends can be calculated by discounting the future cash flows using the equity cost of capital, which is 11%. We can use the dividend discount model (DDM) formula:

Value of a share = Dividends / (1 + Cost of Equity)^n

Given that the expected dividend per share is $2.50 and the equity cost of capital is 11%, we can substitute these values into the formula:

Value of a share = $2.50 / (1 + 0.11)^1 = $2.24

The value of a share of KTI's stock today is closest to $2.24.