Question

You have been provided the following information on BMS Inc, an all-equity financed manufacturer of building materials.

• In the most recent year, which was a bad one, the company made only €40 million in net income. It expects next year to be normal. The book value of equity of the company is €1 billion, and it expects next year a Return on Equity of 10%.
• The company expects to make €80 million in new capital expenditures next year. It expects depreciation, which was €60 million this year, to grow 10% next year.
• The company had revenues of €1.5 billion this year, and it maintained a non-cash working capital investment of 10% of revenues. It expects revenues to increase 20% next year and working capital to decline to 9.5% of revenues.

Next year’s estimated net income is:

Select one:

a. 70 million

b. 100 million

c. 44 million

d. 140 million

e. 40 million

Question 34

Next year’s estimated net capital expenditure is:

Select one:

a. 60 million

b. 80 million

c. 88 million

d. 14 million

e. 20 million

Question 35

Next year’s estimated Change in Working Capital is:

Select one:

a. 150 million

b. 12 million

c. 30 million

d. 21 million

e. 171 million

Question 36

Next year’s estimated Free Cash Flow to Equity (FCFE) is:

Select one:

a. 38 million

b. 59 million

c. 9 million

d. 56 million

e. 65 million

Answer 1

a) Next year estimated net income = (b) 100million

Estimated return on equity = 10% = 10%*1billion = 100million

b) Next year’s estimated net capital expenditure = (d) 14 million

= New capital expenditure - depreciation for next year = 80 million - (60million*110%) = 80 million - 66million = 14 million

c) Next year’s estimated Change in Working Capital = (d) 21 million

Current year revenue = 1.5billion

Estimated next year revenue = Current year revenue*120% = 1.5billion*120% = 1.8billion

Working capital for current year = 10% of Current year revenue = 10%*1500million = 150million

Estimated working capital for next year = 9.5% of estimated next year revenue = 9.5%*1800million = 171million

Estimated change in working capital = Working capital for current year-Estimated working capital for next year

= 171million - 150million = 21million

d) Next year’s estimated Free Cash Flow to Equity = (e) 65million

Next year’s estimated Free Cash Flow to Equity = Next year estimated net income - Next year’s estimated net capital expenditure - Next year’s estimated Change in Working Capital

= 100million - 14million - 21million = 65million