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 expected growth rate for KTI's dividends can be calculated using the formula for sustainable growth rate: g = b * ROE, where b is the retention ratio (the proportion of earnings not paid out as dividends) and ROE is the return on equity, which in this case is the return on new investments. Here, b = 1 - Dividend Payout Ratio = 1 - ($1.50 / $3) = 0.5, and ROE = 15%. Thus, g = 0.5 * 15% = 7.5%.

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