Christie Johnson, CFA, has been assigned to analyze Sundanci. Johnson assumes that Sundanci’s earnings and dividends will grow at a constant rate of 13 percent. Exhibits 1 and 2 provide financial statements for the most recent two years (2007 and 2008) and other information for Sundanci.

A. Based on information in Exhibits 1 and 2 and on Johnson’s assumptions for Sundanci, calculate justified trailing and forward P/Es for this company.
B. Identify, within the context of the constant dividend growth model, how each of the following fundamental factors would affect the P/E:
1) The risk (beta) of Sundanci increases substantially.
2) The estimated growth rate of Sundanci’s earnings and dividends increases.
3) The equity risk premium increases.

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EXHIBIT 1 Sundanci Actual 2007 and 2008 Financial Statements for Fiscal Years Ending 31 May (in Millions except Per-Share Data) Income Statement 2007 2008 Revenue Depreciation Other operating costs Income before taxes Taxes Net income $474 $598 20 23 368 460 86 115 26 35 60 80 Dividends 18 24 Earnings per share $0.714 $0.952 Dividends per share $0.214 $0.286 Common shares outstanding 84.0 84.0 Balance Sheet 2007 2008 Current assets $201 $326 Net property, plant, and 474 489 equipment Total assets 675 815 (continued)