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(solution) Reynolds, Inc. has never paid a dividend. Joe, a stock analyst,


Reynolds, Inc. has never paid a dividend.  Joe, a stock analyst, decides to use the corporate value model to estimate the value of a share of Reynolds common stock.  The company provides financial statements for the next two years, and joe calculates expected free cash flow to be $10 million in year one and $15 million in year two.  Joe expects the free cash flow to increase by 6% per year after year two.  Reynolds, Inc.?s weighted average cost of capital is 14% and its standard deviation of returns is 19%.  The market value of Reynolds Inc.?s debit is $20 million, Reynolds Inc. has no preferred stock, and there are 8 million shares of common stock outstanding.  Estimate the value of a share of Reynolds Inc. common stock. 

 


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