Question

You expect KT Industries (KTI) will have earnings per share of $5 this year and expect that they will pay out $1.25 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 13%. The expected growth rate for KTI's dividend is closest to ______.

Answer 1

9.75%

Step-by-step explanation:

EPS = Earning per share = $5

DPS = Dividend per share $1.25

ROI = return on investment = 13%, or 0.13

RR = Retention rate = (EPS - DPS)/EPS = ($5 - $1.25)/$5 = 0.75, or 75%

Growth = RR * ROI = 13% * 75% = 9.75%

Therefore, the expected growth rate for KTI's dividend is closest to 9.75%