4. Helen Morgan, CFA, has been asked to use the DDM to determine the value of Sundanci, Inc.

Morgan anticipates that Sundanci’s earnings and dividends will grow at 32% for 2 years and 13%

thereafter. Calculate the current value of a share of Sundanci stock by using a two-stage dividend discount model and the data from Tables 18A and 18B.

TABLE 18A 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 84.0 Balance Sheet 2007 2008 Current assets $ 201 $ 326 Net property, plant and equipment 474 489 Total assets 675 815 Current liabilities 57 141 Long-term debt 0 0 Total liabilities 57 141 Shareholders’ equity 618 674 Total liabilities and equity 675 815 Capital expenditures 34 38 TABLE 18B Required rate of return on equity 14%
Growth rate of industry 13%
Industry P/E ratio 26