Reference no: EM131161873

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?Problem: Financial Projections

Question: Buckeye Computer, Inc. produces high performance image generators for simulation (including PC-based visual system products) and visual workstations for high-end graphics applications. Its financial statements are shown in Exhibit 1 (excel filed posted on Canvas).

Suppose Buckeye management sets an annual revenue growth target of 20%. Estimate the free cash flows each year for the next five years 2014-2018. Use the following information to make your projections:

- Project all items (i.e. apart from sales) based on the 5-year historical average financial ratios all measured directly relative to sales** (e.g. Inventory/Sales).

- Assume a tax rate of 35%.

- There are two types of fixed assets: PPE and Other Fixed Assets. Both of them are part of the firm's operations and are measured net of depreciation.

- Other Current Assets refers to prepaid expenses related to the operations of the business.

EXHIBIT 1
BUCKEYE COMPUTER, INC.
($ millions)

Income Statement	2009	2010	2011	2012	2013
Sales	1,604	1,950	2,240	2,456	3,017
Cost of Goods Sold	842	1,020	1,226	1,517	1,739
R&D Expense	158	203	240	278	327
SG&A Expense	367	446	479	522	549
Operating Income (EBIT)	237	281	295	139	402
Interest Expense	8	6	5	13	14
Earnings before Tax	229	275	290	126	388
Income Taxes	85	108	107	40	141
Earnings (NI)	144	167	183	86	247
Dividends	0	18	28	45	49
to Retained Earnings	144	149	155	41	198
Balance Sheet	2009	2010	2011	2012	2013
Cash	103	58	45	17	30
Accounts Receivable	219	283	328	349	431
Inventory	282	348	420	500	584
Other Current Assets	18	22	24	28	32
Current Assets	622	711	817	894	1,077
Plant, Property & Equipment (net)	410	482	536	610	686
Other Fixed Assets	32	39	45	49	61
Total Assets	1,064	1,232	1,398	1,553	1,824
Accounts Payable	145	177	203	233	285
Accrued Expenses	30	32	34	18	31
Short Term Debt	41	31	19	124	35
Current Liabilities	216	240	256	375	351
Long Term Debt	55	50	45	40	137
Net Worth	793	942	1,097	1,138	1,336
Liabilities & Net Worth	1,064	1,232	1,398	1,553	1,824