Value of a share of Sonora Company Stock.

Sonora Corporation expects a 3 year comparative advantage period. Sonora's free cash flow during these 3 years are estimated to be $5 million, $7 million, and $9 million. After the comparative advantage period is over, free cash flow is expected to increase at a rate of 5% per year. Sonora currently has $25 million of debt and 5 million shares of common stock. The standard deviation of company returns is 27%, and the company's cost of capital is 14%. Estimate the value of a share of Sonora Company Stock.

A) $10.60/share
B) $12.01/share
C) $12.34/share
D) $25.20/share

Please show how problem is worked.

© SolutionLibrary Inc. solutionlibary.com 9836dcf9d7 https://solutionlibrary.com/economics/economic-history-and-theory/value-of-a-share-of-sonora-company-stock-7f0p

Solution Preview

... of the company
Terminal value = Year 3 Cash flows *(1+growth rate)/(Cost of Capital -Growth rate)
=9*(1+0.05)/(0.14-0.05)
=105

b) Find the Value of Company

We will discount the above future ...