# 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./

 YEAR FREE CASH FLOW PV FACTOR PV 2017 \$0 0.9259 \$0 2018 \$1.0 0.8573 \$0.59 2019 \$2.4 0.7938 \$1.91 2020 \$2.7 0.7350 \$1.98 2021 \$3.0 0.6806 \$2.04 TOTAL \$6.52

B./

PRICE PER SHARE

= TOTAL PV / NUBER OF SHARE

= \$6.52 / 13

= \$0.50

C./

 YEAR NET INCOME PV FACTOR PV 2017 \$1.0 0.9259 \$0.93 2018 \$2.4 0.8573 \$2.06 2019 \$4.0 0.7938 \$3.19 2020 \$4.5 0.7350 \$3.31 2021 \$4.8 0.6806 \$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