Question

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?

BMC Software is considering adding an additional $250M in debt and repurchasing the firm’s equity with the proceeds. If the stock is current worth $50 per share, how many shares would the firm have to repurchase?

Answer 1

Answer Part 1:

Present value of the terminal value today (2018) = $5,330.36 million

Best estimate of BMC Software’s equity per share in 2018 = $38.06

Working:

Above excel with 'show formula' is as below:

Answer Part 2:

Number of share it has repurchase = Additional Debt proceeds / Current share price = 250 / 50 = 5 million

Number of share it has repurchase = 5 million