You expect KT industries (KTI)will have earnings per share of $5 this year and expect that they will pay out $2.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 14% and their equity cost of capital is 11%. The value of a share of KTI's stock today is closest to ________.

Question

Quizplus · Accepted Answer

We can use the Dividend Discount Model to find the value of KTI's stock:

V = D / (r - g)

Where:
- V is the value of the stock
- D is the dividend payout per share
- r is the cost of equity (in this case, the equity cost of capital)
- g is the growth rate of dividends (which we can calculate as the payout ratio times the return on new investments)

Plugging in the given values, we get:

V = 2.5 / (0.11 - 0.14*0.5)
V = 2.5 / 0.04
V = 62.50

Therefore, the value of a share of KTI's stock today is closest to $62.50, which is answer choice C.

You Expect KT Industries (KTI)will Have Earnings Per Share of $5