You expect KT Industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 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 value of a share of KTI is closest to:

Question

Quizplus · Accepted Answer

To calculate the value of a share of KTI, we can use the dividend discount model:

Value of share = Dividend / (Required return - Growth rate)

The growth rate can be calculated as the product of the return on new investments and the retention rate:

Growth rate = Return on New Investments x (1 - Payout ratio)

In this case, the retention rate is 1 - payout ratio, or 1 - ($1.50 / $3) = 0.5. Therefore, the growth rate is 15% x 0.5 = 7.5%.

Now we can plug in the values:

Value of share = $1.50 / (12% - 7.5%) = $30

However, we need to add the expected earnings of $1.50 per share that will not be paid out as a dividend. This gives us a total value of:

Value of share = $30 + $1.50 = $31.50

Therefore, the closest answer is D) $33.35.

You Expect KT Industries (KTI) Will Have Earnings Per Share