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's stock is closest to:

Question

Quizplus · Accepted Answer

The dividend payout ratio is 50% ($1.50 / $3). The remaining 50% is assumed to be reinvested back into the company and earn a return of 15%. Using the Gordon growth model, we can calculate the value of KTI's stock as:

V = D / (r - g)
V = $1.5 / (0.12 - 0.075)
V = $33.33

Rounding to the nearest cent, the value of KTI's stock is closest to $33.35. Therefore, the best choice is C.

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