Question

hey, it is kind a long question but,

In 2017, BMC Software generated $465M of operating income (earnings before interest and taxes) and

$295M of net income from $2,200M of sales. Over the next two years (2018 and 2019), the firm is

projecting 10% growth in operating income and 5% growth in depreciation expense. Beginning in 2020,

BMC estimates that free cash flows will grow 2%. Assume the firm’s effective tax rate is 30%, weighted

average cost of capital is 9%, and number of shares outstanding is 146M. Depreciation expense for 2017

was $105M while capital expenditures were $55M. Capital expenditures are expected to remain constant

over the next 5 years. BMC expects working capital needs to increase by $20M per year. Lastly, the firm

has $250M in cash and cash equilavents and $750M of interest bearing debt.

What is the present value of the terminal value today (2018)?

and

Using the DCF approach, which of the following is the best estimate of BMC Software’s equity per

share in 2018?

Answer 1

Fig.in mlns.(Except per share value)	End 2017	2018	2019
1.Operating Income/EBIT (growth= 10%)	465	511.5	562.65
2.Tax at 30%( 1*30%)	-139.5	-153.45	-168.795
3.Depreciation (growth=5%)	105	110.25	115.7625
4. CAPEX (given)	-55	-55	-55
5. Increase in Net Working Capital (given)		-20	-20
6.Free cash flow(sum 1 to 5)		393.3	434.6175
7.PV of Terminal value today (beg.of 2018)(434.6175*1.02)/(9%-2%)=			6332.998
8.Total FCF (6+7)		393.3	6767.615
9.PV F at 9%(1/1.09^Yr.n)		0.917431	0.84168
10.PV at 9% (8*9)		360.8257	5696.166
11.NPV/Total Firm Value at beg. Of 2018 (sum Row 10)	6056.992
12.Value of Debt	-750
13.Cash in hand	-250
14.Value of equity (11-12-13)	5056.992
15.No.of common shares o/s	146
16. Value per equity share (14/15)	34.63693
ie.	34.64
ANSWERS:
1.Present value of the terminal value today (2018)	6332.998	Mlns.
2. Best estimate of BMC Software’s equity per share in 2018	$34.64