You have been asked to value a new firm, CloudStore, that produces internet-based memory storage devices.
After a careful analysis of all available information you estimate that CloudStore will generate the following cash flows over the next five years (starting one year from now):
| Year |
0 |
1 |
2 |
3 |
4 |
5 |
| Cash Flow ($millions) |
|
470 |
640 |
4350 |
2750 |
1600 |
After this you expect the cash flows to grow at 5% for every year after year 5.
The discount rate for cash flows with comparable risks to CloudStore and same capital structure is 18%.
a. What is the present value of the cash flows that are expected from year 1 to 4?
b. What is the present value of the cash flows starting in year 5
c. Up to how much would you be willing to pay to acquire this firm?
d. The valuation you just did in c) implicitly assumes that CloudStore keeps finding positive NPV projects to invest in.
Suppose you thought that is not be the case and wanted to know what CloudStore is worth under that scenario.
To estimate this value, suppose that CloudStore's cashflows from 1-4 are unchanged.
The cash flow in year 5 is 1,950 instead of 1,600 (the cash flow is higher in year 5 because they stop investing in new projects)
and then the same level (i.e., 1,950) every year after that.
What is the value of CloudStore in this scenario?
e. How much of the value estimated in c) is due to the NPV of new projects that were expected to be taken from year 5 onwards?