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Value of a share of Sonora Company Stock.

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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.

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Solution Summary

Response provides steps to compute the value of a share of Sonora Company Stock.

Solution Preview

Step1: Find the Company value ( present value of Future Cash flows )

a) Future cash flows are following

Year 1 5
Year 2 7
Year 3 114
Note:
Year 3 will also include estimation of terminal ...

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