Question

You expect KT industries (KTI) will have earnings per share of $3 in one year and expect that they will pay out $2 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 10%. The expected growth rate for KTI's dividends is _______ .

Answer 1

The growth rate is 5%

Step-by-step explanation:

The computation of the expected growth rate is shown below:

= Return on new investment × Retention ratio

= 15% × ($3 - $2) ÷ 3

= 5%

We simply multiplied the return on new investment with the retention ratio so that the growth rate could come

hence, the growth rate is 5%

And, the same is to be considered