Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made in 2019 are as follows: ($ millions) Net income Investment Free cash flow 1.0 0 2020 2021 1.0 2.0 1.0 2022 2023 2024 1.0 2.0 3.2 3.7 4.0 1.2 1.4 2.3 1.4 2.6 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 9%. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Answer is complete and correct. Present value $ 24.48 million b. Assume that Phoenix has 12 million shares outstanding. What is the price per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete and correct. Price per share $ 2.04 c. Confirm that the expected rate of return on Phoenix stock is exactly 9% in each of the years from 2020 to 2024. (Hint: First, calculate the PV of all future cash flows starting in each year. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Years Present Value Rate of Return 2020 $ 6.22 x 9.00 % 2021 $ 5.30 X 9.00 % 2022 $ 3.62× 9.00 % 2023 $ 1.84 x 9.00 % 2024 $ 0.00 9.00 %
Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made in 2019 are as follows: ($ millions) Net income Investment Free cash flow 1.0 0 2020 2021 1.0 2.0 1.0 2022 2023 2024 1.0 2.0 3.2 3.7 4.0 1.2 1.4 2.3 1.4 2.6 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 9%. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Answer is complete and correct. Present value $ 24.48 million b. Assume that Phoenix has 12 million shares outstanding. What is the price per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete and correct. Price per share $ 2.04 c. Confirm that the expected rate of return on Phoenix stock is exactly 9% in each of the years from 2020 to 2024. (Hint: First, calculate the PV of all future cash flows starting in each year. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Years Present Value Rate of Return 2020 $ 6.22 x 9.00 % 2021 $ 5.30 X 9.00 % 2022 $ 3.62× 9.00 % 2023 $ 1.84 x 9.00 % 2024 $ 0.00 9.00 %
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter7: Corporate Valuation And Stock Valuation
Section: Chapter Questions
Problem 25SP: Start with the partial model in the file Ch07 P25 Build a Model.xlsx on the textbook’s Web site....
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Transcribed Image Text:Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made in 2019 are as
follows:
($ millions)
Net income
Investment
Free cash flow
1.0
0
2020 2021
1.0 2.0
1.0
2022 2023 2024
1.0
2.0
3.2 3.7 4.0
1.2 1.4
2.3
1.4
2.6
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 9%. (Do not round intermediate calculations. Enter your answer in
millions rounded to 2 decimal places.)
Answer is complete and correct.
Present value
$
24.48
million
b. Assume that Phoenix has 12 million shares outstanding. What is the price per share? (Do not round intermediate calculations.
Round your answer to 2 decimal places.)
Answer is complete and correct.
Price per share
$
2.04
c. Confirm that the expected rate of return on Phoenix stock is exactly 9% in each of the years from 2020 to 2024. (Hint: First,
calculate the PV of all future cash flows starting in each year. Round your answer to 2 decimal places.)
Answer is complete but not entirely correct.
Years
Present Value
Rate of Return
2020
$
6.22 x
9.00
%
2021
$
5.30 X
9.00
%
2022
$
3.62×
9.00
%
2023
$
1.84 x
9.00
%
2024
$
0.00
9.00
%
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