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DCF Analysis at CloudCore Inc.
New

< 100
Times solved
5.0
< 100 Ratings
Intermediate
Difficulty

Case Prompt

You’re working on a DCF valuation for CloudCore Inc., a publicly traded cloud computing company. You’ve built a standard unlevered DCF model using a WACC of 10% and based on your 5-year forecast, the Enterprise Value (EV) currently comes out to $200 million.

1) Planned Data Center Investment

Partway through the project, CloudCore announces plans to build a new data center in Year 4, costing $100 million in cash, without any debt or lease financing. The company expects the investment to support future growth, but no additional revenue or cost savings will show up in the 5-year forecast.

How should you adjust your DCF model to reflect the planned data center investment?

What is the impact of this adjustment on the company’s Enterprise Value?

2) Convertible Bonds in the Capital Structure

As you refine your WACC and move toward calculating per-share value, you review CloudCore’s capital structure. In addition to $100 million in standard debt, the company has:

  • $50 million in convertible bonds with a conversion price of $10/share
  • The current share price is $15
  • The company has 20 million basic shares outstanding
  • No options or warrants are outstanding
  • $10 million in cash

How should you treat convertible debt?

Calculate the company’s Equity Value and per-share price based on your DCF.

In more complex cases, why does calculating the per-share value become circular, and how does Excel handle this?

3) Timing of Cash Flows

Just before you finalize your report, a senior colleague challenges one of your modeling assumptions: “Are you assuming the company generates all its cash at the end of each year?”

Why might you consider applying the mid-year convention in this DCF?

What discount periods would you use under the mid-year convention if your DCF starts with a stub period (for example, Q4 of Year 1)?

< 100
Times solved
Intermediate
Difficulty
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