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 two 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 13.11 and 13.12.

TA B L E 1 3 . 1 1 Sundanci actual 2009 and forecast 2010 financial statements for fiscal years ending May 31 ($ million, except per-share data)

Income Statement 2009 2010 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 2009 2010 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 www.mhhe.com/bkm 432 Part FOUR Security Analysis Required rate of return on equity 14%

Growth rate of industry 13%

Industry P/E ratio 26 TA B L E 1 3 . 1 2 Selected financial information LO.1