Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow

Question

Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made at the beginning of 2016 are as follows: ($ millions) 2017 2018 2019 2020 2021 Net income 1 4 7.2 7.7 8 Investment 1 3 3.2 3.4 3.4 Free cash flow 0 1 4 4.3 4.6 Phoenix Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made at the beginning of 2016 are as follows: ($ millions) 2017 2018 2019 2020 2021 Net income 1 4 7.2 7.7 8 Investment 1 3 3.2 3.4 3.4 Free cash flow 0 1 4 4.3 4.6 Phoenix

Explanation / Answer

Calculate the PV of free cash flow, assuming a cost of equity of 10%. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Present Value = 0 + 1/1.1^2 + 4/1.1^3 + 4.3/1.1^4 + 4.6/1.1^5 = $ 9.62 million

value of the firm = 0 + 1/1.1^2 + 4/1.1^3 + 4.3/1.1^4 + 4.6/1.1^5 + Terminal value of the firm

Here assumed that 4.6 million cash flow is being earned each year after 20121 and there is no growth   

= 0 + 1/1.1^2 + 4/1.1^3 + 4.3/1.1^4 + 4.6/1.1^5 + (4.6 / .1) / 1.1^5

= 9.62 + 28.56 = $38.182 Million

Price of each share = 38.182 / no. of shares = 38.182/ 14 = $2.727

P/E ratio = Market price per share / earning per share   

for year 2018 P/E ration = 2.727 / (4/14) = 9.56

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