Abbey Naylor, CFA, has been directed to determine the value of Sundanci’s stock using the Free Cash Flow to Equity (FCFE) model. Naylor believes that Sundanci’s FCFE will grow at 27% for 2 years and 13% thereafter. Capital expenditures, depreci ation, and working capital are all expected to increase proportionately with FCFE. a. Calculate the amount of FCFE per share for the year 2008, using the data from table.
b. Calculate the current value of a share of Sundanci stock based on the two-stage FCFE model.
c. i. Describe one limitation of the two-stage DDM model that is addressed by using the two stage FCFE model.
ii. Describe one limitation of the two-stage DDM model that is not addressed by using the two-stage FCFE model.
Income Statement
2007
2008
Revenue
$ 474
$ 598
Depreciation
20
23
Other operating costs
368
460
Income before taxes
86
115
Taxes
26
35
Net income
60
80
Dividends
18
24
Earnings per share
$0.714
$0.952
Dividend per share
$0.214
$0.286
Common shares outstanding (millions)
84.0
Balance Sheet
Current assets
$ 201
$ 326
Net property, plant and equipment
474
489
Total assets
675
815
Current liabilities
57
141
Long-term debt
0
Total liabilities
Shareholders’ equity
618
674
Total liabilities and equity
Capital expenditures
34
38
Selected financial information
Required rate of return on equity
14%
Growth rate of industry
13%
Industry P/E ratio
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