You expect KT Industries (KTI) will have earnings per share of $3 this yearand 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:

A) $39.25

B) $20.00

C) $33.35

D) $12.50

C) $33.35

Explanation:

First, find the growth rate using retention rate and Return on new investment;

g = retention rate * return on new investment

Retention rate = (3.00 - 1.50) / 3.00 = 0.5

return on new investment = 15% or 0.15 as a decimal

g = 0.5 * 0.15 = 0.075 or 7.5%

Price (P0) = Div1 / (rE - g)

= 1.50 / (0.12 - 0.075) = 33.33

Therefore, the current value of the stock is 33.33 which is closest to 33.35.