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

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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