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 expected growth rate for KTI's dividends is closest to:

Question

Quizplus · Accepted Answer

We can use the Gordon Growth Model to calculate the expected growth rate of KTI's dividends:

Expected Growth Rate = Retention Rate x Return on New Investments

Retention Rate = 1 - Dividend Payout Ratio = 1 - 1.50/3 = 0.50
Return on New Investments = 15%

Expected Growth Rate = 0.50 x 15% = 7.5%

Therefore, the closest answer choice is B (7.5%).

You Expect KT Industries (KTI)will Have Earnings Per Share of $3