Produces Internet-Based Memory Storage Devices – Finance Assignment Help

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Assignment Task :
Questions Based on Session 2
1 You own a gas pipeline that requires no maintenance and will produce $2 million of revenue next year. Unfortunately, after the first year the volume of gas (and thus the revenue) is expected to decline by 4.0% per year.
a. If the discount rate is 11.0% and the pipeline lasts forever, what is it worth today?
b. If the pipeline is to be abandoned at the end of 20 years, what is it worth today?
 
2 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):
Cash
 
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 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 newprojects) 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 that you estimated in c) is due to the NPV of new projects that were expected to be taken from year 5 onwards?
3 Your firm just received a loan from the bank and you want to see if it was good investment (assume the interest payouts happen annually).
a. Suppose you borrowed $100 for a year at a competitive interest rate of 6%. What is the present value of total payments (interests and principal) to the bank? To compute this present value, use the discount rate r = 6% (as this is the competitive market rate, you could receive yourself if you wish).
b. Suppose instead you borrowed $200 for two years, at 7%. What is the present value of interests and principal payments? (use r = 7% this time, as this is competitive rate).
c. What if you borrowed $350 for three years at 10%? (use r = 10%)
d. What is the pattern? In a competitive market, does raising interest-bearing debt on a firm balance sheet increase or decrease the present value of its cash flow?
 
 
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