DCF Analysis at CloudCore Inc.

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You should include the $100 million cost as a capital expenditure in Year 4, which reduces the Free Cash Flow for that year by the same amount. This reflects the cash outflow needed to fund the investment, even if it doesn’t yet affect operating performance.

The Enterprise Value will decrease by the present value of the $100 million CapEx in Year 4. 

The revised Enterprise Value is approximately $131.7 million after accounting for the discounted cost of the data center investment.

It depends on whether the convertible debt is in-the-money or out-of-the-money:

• If the company’s share price is higher than the conversion price, the convertible debt is in-the-money. That means investors will likely convert it into stock, so we treat it as equity, not debt. It increases the company’s Equity Value and does not count toward the debt when calculating Levered Beta.
• If the share price is lower than the conversion price, the convertible debt is out-of-the-money. In that case, investors will keep it as debt, so we treat it like normal debt and include it in the debt portion of the WACC and Levered Beta calculation.

In this case, the convertible debt is in-the-money (since $15 > $10), so it’s treated as equity. You exclude the $50M from the debt portion and include it in Equity Value when calculating Levered Beta and WACC.

To calculate the per-share value, we convert Enterprise Value to Equity Value by adjusting for cash, debt, and convertibles. While this can be circular in complex cases, here we assume full conversion since the convertible bonds are clearly in-the-money, so we can calculate the diluted share count directly.

• Circularity happens when dilution depends on the share price, but the share price also depends on dilution.
• For example, options are only exercised if the share price is above the strike price.
• That means the number of shares changes depending on the result you’re trying to calculate.
• This creates a loop that can’t be solved with a single formula.
• Excel resolves this using iterative calculations, which update the share price and share count repeatedly until the numbers converge.

• In reality, companies earn cash throughout the year, not just at year-end.
• The mid-year convention assumes even distribution of cash flows, so you discount them 0.5 years earlier (i.e. use periods of 0.5, 1.5, 2.5…).
• This typically results in a slightly higher present value, since cash is discounted over a shorter time.
• It’s a more accurate reflection of operating reality, especially for companies with steady, recurring revenue like CloudCore.

• For stub periods, you apply the mid-year adjustment proportionally.
• First, divide the stub period (e.g. 0.25 for Q4) by 2 → 0.125.
• Then subtract 0.5 from all normal full-year discount periods.