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29 October, 03:18

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:

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  1. 29 October, 06:57
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    7.50%

    Explanation:

    Expected earning per share = $3

    Expected dividend per share (D1) = $1.50

    Return on new investment (ROE) = 15%

    Equity cost of capital = 12%

    Dividend payout ratio = Expected dividend : Expected earning per share

    = 1.5 : 3

    = 0.5

    Expected growth rate = ROE (1 - Dividend payout ratio)

    = 15% * (1 - 0.5)

    = 7.50%
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