A company is valuing its equity prior to an initial public offering (IPO).

Dividend Valuation Model (Gordon growth).

EPS = $1.00

Payout ratio = 40% → D0=0.40D_0 = 0.40D0​=0.40

Growth g=2%=0.02g = 2\% = 0.02g=2%=0.02

Cost of equity ke=12%=0.12k_e = 12\% = 0.12ke​=12%=0.12

Use:

P0=D1ke−g=D0(1+g)ke−gP_0 = \frac{D_1}{k_e - g} = \frac{D_0(1+g)}{k_e - g}P0​=ke​−gD1​​=ke​−gD0​(1+g)​ D1=0.40×1.02=0.408D_1 = 0.40 \times 1.02 = 0.408D1​=0.40×1.02=0.408 P0=0.4080.12−0.02=0.4080.10=4.08P_0 = \frac{0.408}{0.12 - 0.02} = \frac{0.408}{0.10} = 4.08P0​=0.12−0.020.408​=0.100.408​=4.08

Answer: A. $4.08