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

Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made in 2019 are as follows:

$ millions	2020	2021	2022	2023	2024
Net Income	1.0	2.5	4.2	4.7	5.0
Investment	1.0	1.5	1.7	1.9	1.9
Free Cash Flow	0	1.0	2.5	2.8	3.1

Phoenix’s recovery will be complete by 2024, and there will be no further growth in net income or free cash flow. a) Calculate the PV of free cash flow, assuming a cost of equity of 10%. b) Assume that Phoenix has 12 million shares outstanding. What is the price per share?

Solutions

Expert Solution

a. The PV is computed as shown below:

= Free cash flow in 2020 / (1 + cost of equity) + Free cash flow in 2021 / (1 + cost of equity)² + Free cash flow in 2022 / (1 + cost of equity)³ + Free cash flow in 2023 / (1 + cost of equity)⁴ + Free cash flow in 2024 / (1 + cost of equity)⁵ + 1 / (1 + cost of equity)⁵ x [ (Free cash flow in 2024 / cost of equity) ]

= $ 0 million / 1.10 + $ 1 million / 1.10² + $ 2.5 million / 1.10³ + $ 2.8 million / 1.10⁴ + $ 3.1 million / 1.10⁵ + 1 / 1.10⁵ x [ ($ 3.1 million / 0.10) ]

= $ 0 million / 1.10 + $ 1 million / 1.10² + $ 2.5 million / 1.10³ + $ 2.8 million / 1.10⁴ + $ 3.1 million / 1.10⁵ + 31 million / 1.10⁵

= $ 0 million / 1.10 + $ 1 million / 1.10² + $ 2.5 million / 1.10³ + $ 2.8 million / 1.10⁴ + $ 34.1 million / 1.10⁵

= $ 25.79058807 million $ 25.79 million Approximately

b. The price per share is computed as shown below:

= Price computed in part a above / Number of shares outstanding

= $ 25.79058807 million / 12 million shares

= $ 2.15 Approximately

Please ask in case of any query.

jeff jeffy answered 1 year ago

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