Shovel Corp. reported sales of $241 million last year. Snowy weather is forecasted inyear 1 and it expects sales to increase by 20%. Sales growth is expected to slow to 10%in year 2 and 5% in year 3. Assume that the long-run growth rate of free cash flowsis 2% per year. Based on historical estimates, you expect Shovel Corp.'s total costs tobe 80% of sales in year 1 and and year 2. Cost savings will be introduced starting inyear 3 onwards, reducing total costs to be 70% of sales. You expect depreciation to be5% of sales, increases in net working capital to be 10% of any increase in sales, andcapital expenditures to be 15% of any increase in sales. Shovel Corp. currently has$70 million in cash, $50 million in debt, 10 million shares outstanding, a tax rate of21%, and a weighted average cost of capital of 12%. Estimate Shovel Corp.'s free cashflows to the firm. What is its stock price at the beginning of this year? How does thischange if the long-run growth rate is lower than expected and decreases to 1%?

Answer rating: 100% (QA)

To estimate Shovel Corps free cash flows to the firm FCFF and its stock price well calculate the cash flows for each year and then determine the present value of those cash flows 1 Year 1 Sales 241 mi... View the full answer