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

The dividend payout ratio can be calculated as:

Dividend payout ratio = Dividends per share / Earnings per share
= $1.50 / $3
= 0.5 or 50%

The retention ratio can be calculated as:

Retention ratio = 1 - Dividend payout ratio
= 1 - 0.5
= 0.5 or 50%

The sustainable growth rate can be calculated as:

Sustainable growth rate = Return on new investments x Retention ratio
= 15% x 0.5
= 7.5%

Therefore, the expected growth rate for KTI's dividends is closest to 7.5%, which is option B.

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