The management of Telluride, an international diversified conglomerate based in the United States, believes that the recent strong performance of its wholly owned medical supply subsidiary, Sundanci, has gone unnoticed. To realize Sundanci€™s full value, Telluride has announced that it will divest Sundanci in a tax - free spin - off. Sue Carroll, CFA, is director of research at Kesson and Associates. In developing an investment recommendation for Sundanci, Carroll has gathered the information shown in Exhibits 4 - 19 and 4 - 20 .
EXHIBIT 4-19 Sundanci Actual 2007 and 2008 Financial Statements for Fiscal Years
Ending 31 May (dollars in millions except per-share data)

EXHIBIT 4 - 20 Selected Financial Information
Required rate of return on equity ........14%
Industry growth rate ............................13%
Industry P/E ........................................26

Abbey Naylor, CFA, has been directed by Carroll to determine the value of Sundanci€™s stock by using the FCFE model. Naylor believes that Sundanci€™s FCFE will grow at 27 percent for two years and at 13 percent thereafter. Capital expenditures, depreciation, and working capital are all expected to increase proportionately with FCFE.
A. Calculate the amount of FCFE per share for 2008 by using the data from Exhibit 4 - 19.
B. Calculate the current value of a share of Sundanci stock based on the two - stage FCFE model.
C. Describe limitations that the two - stage DDM and FCFE models have in common.

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