Exam F3 Topic 2 Question 54 Discussion

Actual exam question for CIMA's F3 exam
Question #: 54
Topic #: 2
A company is valuing its equity prior to an initial public offering (IPO).
Relevant data:
* Earnings per share $1.00
* WACC is 8% and the cost of equity is 12%
* Dividend payout ratio 40%
* Dividend growth rate 2% in perpetuity
The current share price using the Dividend Valuation Model is closest to:

Suggested Answer: A Vote an answer

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

by Xaviera at May 20, 2026, 10:46 AM

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