Question

You expect KT Industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $2.00 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: 4.5% 7.5% 5.0% 3.0%

Answer 1

$28.36

Step-by-step explanation:

Data provided

Earning per share = $3

Dividend per share = $2

Return on new investments = 15%

Equity cost of capital = 12%

The computation of value of KTI is shown below:-

Growth rate per share = Return on new investments × (1 - Dividend Payout ratio)

Dividend Payout ratio = Expected divided ÷ Expected earning per share

= $2 ÷ $3

= $0.67

Growth rate = 15% × (1 - $0.67)

= 4.95%

Value of share = Dividend per share ÷ Equity cost of capital - Growth rate

= $2 ÷ (12% - 4.95%)

= $2 ÷ 7.05%

= $28.36