Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow
ID: 2777503 • Letter: P
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 1.0 2.0 3.2 3.7 4.0 Investment 1.0 1.0 1.2 1.4 1.4 Free cash flow 0 1.0 2.0 2.3 2.6 Phoenix’s recovery will be complete by 2021, and there will be no further growth in free cash flow.
a. Calculate the PV of free cash flow, assuming a cost of equity of 9%. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
Present value $ million
b. Assume that Phoenix has 12 million shares outstanding. What is the price per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Price per share $
c. What is Phoenix’s P/E ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
P/E ratio
Explanation / Answer
a)Value of firm on 2021 = FCF 2021/ ko
= 2.60/0.09 Million
= 28.89 million
year
free Cash flow
PV factor 9%
PV
1
0
0.9174
0.00
2
1
0.8417
0.84
3
2
0.7722
1.54
4
2.3
0.7084
1.63
5
2.6+28.89
0.6499
20.47
Total PV
24.48
Hence, PV of free cash flows ( value of equity) is 24.48 Million
b) Price per share = total value of equity/ No. of stocks outstanding
= 24.48 million/ 12 million
= 2.04
c)
Earnings per share EPS = net income/ No. of stocks outstanding
= 1 million/ 12 million
=0.0833
P/E ratio = price per share/ EPS
= 2.04/0.0833
= 24.48
year
free Cash flow
PV factor 9%
PV
1
0
0.9174
0.00
2
1
0.8417
0.84
3
2
0.7722
1.54
4
2.3
0.7084
1.63
5
2.6+28.89
0.6499
20.47
Total PV
24.48