Calculate the current value of a share of Sundanci stock by using a two-stage dividend discount…

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 2 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 Below.Sundanci actual 2007 and 2008 financial statements for fiscal years ending May 31 ($ million, except per share data)

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

Selected financial information

Required rate of return on equity

14%

Growth rate of industry

13%

Industry P/E ratio

26