Problem: Helen Morgan, CFA, has been asked by Carroll to determine the potential valuation for Sundanci, INC., using the dividend discount model. Morgan anticipates that Sundanci's earnings and dividends will grow at 32 percent for two years and 13 percent thereafter. Calculate the current value of share of Sundanci stock using a two-stage dividend discount model and the data from the given below. Show your work.
INCOME STATEMENT: 1999 2000
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
EPS $0.714 $0.952
Dividend Per Share $0.214 $0.286
Common Shares Outstanding 84mil 84mil
BALENCE SHEET:
Current Assets $201 $326
Net, PPE 474 489
Total Assets 675 815
Current Liabilities 57 141
Long-term Debt 0 0
Total Liabilities 57 141
Shareholders Equity 618 674
Total liab. & Equity 675 815
Capital Expenditures 34 38
REQUIRED RATE OF RETURN ON EQUITY = 14%
GROWTH RATE OF INDUSTRY = 13%
INDUSTRY P/E Ratio = 26