John Jones is head of the research department of Peninsular Research. Once of the companies he is researching, MacKinac Plc., is a UK-based manufacturing company. Mackinac has released the June 2007 financial statements shown in Exhibits 1, 2, and 3. Exhibit 1: Mackinac Plc. Annual Income Statement 30 June 2019 (in thousands, except per-share data) Sales 250,000 Cost of goods sold 125,000 Gross operating profit 125,000 Selling, general, and administrative expenses 50,000 EBITDA 75,000 Depreciation and amortization 10,500 EBIT 64,500 Interest expense 11,000 Pretax income 53,500 Income taxes 16,050 Net income 37,450 Shares outstanding 13,000 EPS 2.88 Exhibit 2: MacKinac Plc. Balance Sheet 30 June 2019 (in thousands) Current Assets Cash and equivalents 20,000 Receivables 40,000 Inventories 29,000 Other current assets 23,000 Total current assets 112,000 Non-current Assets Property, plant, and equipment 145,000 Less: Accumulated depreciation 43,000 Net property, plant, and equipment 102,000 Investments 70,000 Other noncurrent assets 36,000 Total noncurrent assets 208,000 Total Assets 320,000 Current Liabilities Accounts payable 41,000 Short-term debt 12,000 Other current liabilities 17,000 Total current liabilities 70,000 Non-Current Liabilities Long-term debt 100,000 Total non-current liabilities 100,000 Total liabilities 170,000 Shareholders Equity Common equity 40,000 Retained earnings 110,000 Total equity 150,000 Total liabilities and equity 320,000 Exhibit 3: MacKinac Plc. Statement of Cash Flows 30 June 2019 (in thousands) Cash Flow from Operating Activities Net income 37,450 Depreciation and amortization 10,500 Change in Working Capital (Increase) decrease in receivables (5,000) (Increase) decrease in inventories (8,000) Increase (decrease) in payables 6,000 Increase (decrease) in other current liabilities 1,500 Net change in working capital (5,500) Net cash from operating activities 42,450 Cash Flow from Investing Activities Purchase of property, plant, and equipment (15,000) Net cash from investing activities (15,000) Cash Flow from Financing Activities Change in debt outstanding 4,000 Payment of cash dividends (22,470) Net cash from financing activities (18,470) Net change in cash and cash equivalents 8,980 Cash at beginning of period 11,020 Cash at end of period 20,000 MacKinac has announced that it has finalised an agreement to handle European production of a successful product currently marketed by a company headquartered outside Europe. Jones decides to value MacKinac by using the dividend discount (DDM) model and the Free Cash Flow to Equity (FCFE) model. After reviewing MacKinacs financial statements and forecasts related to the new production agreement, Jones concludes the following: MacKinacs earnings and FCFE are expected to grow 17 percent a year over the next three years before stabilizing at an annual growth rate of 9 percent. MacKinac will maintain the current payout ratio. MacKinacs beta is 1.25. The government bond yield is 6 percent and the market equity risk premium is 5 percent. Required: . Q) Jones is discussing with a corporate client the possibility that the client will acquire a 70 percent interest in Mackinac. Discuss whether the DDM or FCFE model is more appropriate for this clients valuation purposes.