Abbey Naylor, CFA, has been directed to determine the value of Sundancis stock using the Free Cash Flow to Equity (FCFE) model. Naylor believes that

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, depreciation, 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 FCFEmodel.

Income Statement 2007 2008 5 474 20 368 86 26 60 18 $0.714 $0.214 84.0 Revenue Depreciation Other operating costs Income before taxes Taxes Net income Dividends Earnings per share Dividend per share Common shares outstanding (millions) Balance Sheet Current assets Net property, plant and equipment $ 598 23 460 115 35 80 24 $0.952 $0.286 84.0 2008 326 489 815 141 0 141 674 815 38 2007 s 201 474 675 57 Total assets Current liabilities Long-term debt Total liabilities Shareholders' equity 57 618 675 34 Total liabilities and equity Capital expenditures