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 2011, using the data from Table 18A.

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.

Table 18A

Income Statement 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 2010 2011 $474 20 368 86 26 S 598 23 Aeit 115 35 18 $0.714 $0.214 84.0 24 $0.952 $0.286 84.0 2010 2011 201 474 675 57 S326 U3 815 141 Total assets Current liabilities Long-term debt Total liabilities 57 618 675 34 141 674 815 38 Shareholders' equity Total liabilities and equity Capital expenditures