5. 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 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 twostage 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 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