To continue with Sundanci, 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 two 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 2010, using the data from Table 13.11.

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 two-stage FCFE model.

ii. Describe one limitation of the two-stage DDM model that is not addressed by using the two-stage FCFE model.

 LO.1