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%. b. Assume that Phoenix has 12 million shares outstanding. What is the price per share? c. If the 2016 net income is $1 million, what is Phoenix’s P/E ratio? How do you expect that P/E ratio to change from 2017 to 2021? d. Confirm that the expected rate of return on Phoenix stock is exactly 9% in each of the years from 2017 to 2021.

Answer,: SOLUTION: a. PV2016= DIV2017/ (1 + r) + DIV2018/ (1 + r)2+ DIV 2019 / (1 + r ) 3 + DIV 2020 / (1 + r ) 4 + DIV 2021 / (1 + r ) 5 + (DIV 2021 / r) / (1 + r ) 5 PV 2016 = $0 / 1.09 + $1 / 1.09 2 + $2 / 1.09 3 + $2.3 / 1.09 4 + $2.6 / 1.09 5 + ($2.6 / .09) / 1.09 5 PV 2016 = $24.48 million b. Price per share 2016 = PV 2016 / number of shares Price per share 2016 = $24.48 / 12 Price per share 2016 = $2.04 c. Based on $1million of net income for 2016: P/E 2016 = $24.48 / $1 = 24.48 The PV of the cash flows at various points in time are as follows: PV 2017 = $1 / 1.09 + $2 / 1.09 2 + $2.3 / 1.09 3 + $2.6 / 1.09 4 + ($2.6 / .09) / 1.09 4 PV 2017 = $26.68 PV 2018 = $2 / 1.09 + $2.3 / 1.09 2 + $2.6 / 1.09 3 + ($2.6 / .09) / 1.09 3 PV 2018 = $28.09 PV 2019 = $2.3 / 1.09 + $2.6 / 1.09 2 + ($2.6 / .09) / 1.09 2 PV 2019 = $28.61 PV 2020 = $2.6 / 1.09 + ($2.6 / .09) / 1.09 2 PV 2020 = $28.89 PV 2021 = $2.6 + ($2.6 / .09) / 1.09 PV 2021 = $28.89

Explanation:

1. c

2. b

3. a

4. c

5. a

6. b

7. c

8. c

9.b

10. d

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