Question

You expect KT industries​ (KTI) will have earnings per share of $ 6 $6 this year and expect that they will pay out $ 1.25 $1.25 of these earnings to shareholders in the form of a dividend. ​ KTI's return on new investments is 13 13​% and their equity cost of capital is 14 14​%. The value of a share of​ KTI's stock is closest​ to:

Answer 1

$8.93

Step-by-step explanation:

The payment made to the stockholders is known as dividend.

Price of the stock can be determined by calculating the present value of all future expected dividends using cost of capital.

In this question $1.25 per share dividend is paid and rate of return / cost of capital is 14%, so price of stock will be calculated as follow.

Price of the share = Dividend / Cost of Capital = $8.93

Price of the share = $1.25 / 14% = $8.93