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The management of Telluride, an international diversified conglomerate based in the United

The management of Telluride, an international diversified conglomerate based in the United

The management of Telluride, an international diversified conglomerate based in the United States, believes that the recent strong performance of its wholly owned medical supply subsidiary, Sundanci, has gone unnoticed. To realize Sundanci’s full value, Telluride has announced that it will divest Sundanci in a tax-free spin-off.

Sue Carroll, CFA, is director of research at Kesson and Associates. In developing an investment recommendation for Sundanci, Carroll has gathered the information shown in exhibits 1 and 2 below:

Exhibit 1 Sundanci Actual 2007 and 2008 Financial Statements for Fiscal Years ending 31 May

(dollars in millions 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

EPS                                                                                                  

0.714

0.952

Dividends per share                                                              

0.214

0.286

Common shares outstanding                                          

Balance Sheet

84.0

84.0

Current assets (includes $5 cash in 2007 and 2008)

201

326

Net property, plant and equipment         

474

489

Total assets                                                               

675

815

Current liabilities (all non-interest bearing)

57

141

Long-term debt                                                    

0

0

Total liabilities                                                      

57

141

Shareholders’ equity                                          

618

674

Total liabilities and equity                              

675

815

Capital expenditures                                          

Exhibit 2: Selected Financial Information

34

38

Required rate of return on equity              

14%

Industry growth rate                                          

13%

Industry P/E                                                            

26

You have been directed by Carroll to determine the value of Sundanci’s stock by using the FCFE model. You believe that Sundanci’s FCFE will grow at 27% for two years and at 13% thereafter. Capital expenditures, depreciation, and working capital are all expected to increase proportionately with FCFE.

a.Calculate the amount of FCFE per share for 2008 by using the data from exhibit 1.

b.Calculate the current value of a share of Sundanci stock based on the two-stage FCFE model

c.Describe limitations that the two-stage DDM and FCFE models have in common.

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

EPS                                                                                                  

 

0.714

 

0.952

Dividends per share                                                              

 

0.214

 

0.286

Common shares outstanding                                          

Balance Sheet

 

84.0

 

84.0

Current assets (includes $5 cash in 2007 and 2008)

 

201

 

326

Net property, plant and equipment         

 

 

474

 

489

Total assets                                                               

 

 

675

 

815

Current liabilities (all non-interest bearing)

 

 

57

 

141

Long-term debt                                                    

 

 

0

 

0

Total liabilities                                                      

 

 

57

 

141

Shareholders’ equity                                          

 

 

618

 

674

Total liabilities and equity                              

 

 

675

 

815

Capital expenditures                                          

Exhibit 2: Selected Financial Information

 

 

34

 

38

Required rate of return on equity              

14%

 

 

 

 

Industry growth rate                                          

13%

 

 

 

 

Industry P/E                                                            

26

 

 

 

 

           
Abhinav 30-Nov-2019

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