1. Abbey Naylor, CFA, has been directed to determine the value of Sundancis stock using the Free Cash Flow to Equity (FCFE) model. Naylor believes that Sundancis 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.
   1. Calculate the amount of FCFE per share for the year 2018, using the data from Table 18A.
   2. Calculate the current value of a share of Sundanci stock based on the two-stage FCFE model.

Table 18A

Sundanci actual 2017 and 2018 financial statements for fiscal years ending May 31 ($ million, except per-share data)

Income Statement		2017		2018
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		2017		2018
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

Selected financial information.

Required rate of return on equity		14%
Growth rate of industry		13%
Industry P/E ratio		26