Valuing free cash flow 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 2.4 4.0 4.5 4.8 Investment 1.0 1.4 1.6 1.8 1.8 Free cash flow 0 1.0 2.4 2.7 3.0 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 8%. b. Assume that Phoenix has 13 million shares outstanding. What is the price per share? c. What is Phoenix’s P/E ratio?

    A./

    YEARFREE CASH FLOWPV FACTORPV
    2017$00.9259$0
    2018$1.00.8573$0.59
    2019$2.40.7938$1.91
    2020$2.70.7350$1.98
    2021$3.00.6806$2.04
    TOTAL$6.52

    B./

    PRICE PER SHARE

    = TOTAL PV / NUBER OF SHARE

    = $6.52 / 13

    = $0.50

    C./

    YEARNET INCOMEPV FACTORPV
    2017$1.00.9259$0.93
    2018$2.40.8573$2.06
    2019$4.00.7938$3.19
    2020$4.50.7350$3.31
    2021$4.80.6806$3.27
    TOTAL$12.76

    EPS

    = $12.76 / 13

    = $0.98

    C./

    P/E RATIO

    = PRICE PER SHARE / EPS

    = $0.50 / $0.98

    = 0.51