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 - Payout ratio = 1 - $1.50/$3 = 0.50

Expected growth rate = 0.50 x 15% = 7.5%

Therefore, the closest answer is B) 7.5%.

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