Assignment:
Valuing free cash flow
Q: 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 3.3 5.8 6.3 6.6
Investment 1.0 2.3 2.5 2.7 2.7
Free cash flow 0 1.0 3.3 3.6 3.9
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 10%.
b. Assume that Phoenix has 10 million shares outstanding. What is the price per share?
c. What is Phoenix's P/E ratio?