Reference no: EM131990914
These are wrong, relook Please, read the problem carefully
Problem 3-13 Term-structure theories
The one-year spot interest rate is r1 = 5.6%,and the two-year rate is r2 = 6.6%. If the expectations theory is correct, what is the expected one-year interest rate in one year's time? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Real interest rate ≈ nominal interest rate - inflation rate
And
Nominal interest rate ≈ real interest rate + expected inflation rate
5.6+6.6=12.2
Expected interest rate 12.2%
Problem 3-14 Real interest rates
The two-year interest rate is 11.4%,and the expected annual inflation rate is 5.7%.
a. What is the expected real interest rate? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Problem 3-14 Real interest rates
The two-year interest rate is 11.4%,and the expected annual inflation rate is 5.7%.
a. What is the expected real interest rate? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Solution
|
($ millions)
|
2017
|
2018
|
2019
|
2020
|
2021
|
|
Net income
|
1.0
|
3.3
|
5.8
|
6.3
|
6.6
|
|
Investment
|
1.0
|
2.3
|
2.5
|
2.7
|
2.7
|
|
Free cash flow
|
0
|
1.0
|
3.3
|
3.6
|
3.9
|
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 10%. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
PV2016= DIV2017/ (1 + r) + DIV2018/ (1 + r)2+ DIV2019/ (1 + r)3+ DIV2020/ (1 + r)4+ DIV2021/ (1 + r)5+ (DIV2021/ r)/ (1 + r)5PV2016= $0 / 1.09 + $1 / 1.092+ $2 / 1.093+ $2.3 / 1.094+ $2.6 / 1.095 + ($2.6 / .09) / 1.095PV2016= $24.48 million
Present value $24.8 million
b. Assume that Phoenix has 10 million shares outstanding. What is the price per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Price per share2016= PV2016/ number of shares
Price per share2016 = $24.48 / 12
Price per share2016= $2.04
Price per share $2.04
c. What is Phoenix's P/E ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Based on $1million of net income for 2016:
P/E2016= $24.48 / $1 = 24.48
P/E ratio 24.48