arch of 2011, Macklemore Corp. considered an acquisition of Blue Scholar Learning, Inc. (BSL), a privately held educational software firm. As a first step in deciding what price to bid for BSL, Macklemores CFO, Ryan Lewis, has prepared a five-year financial projection for the company assuming the acquisition takes place.

Blue Scholar Learning, Inc. (BSL)
5-year Financial Projection
($ millions)
	Actual 2010			2011			2012			2013			2014			2015
Income Statement
Net sales	$	1,996		$	2,267		$	2,508		$	2,827		$	3,138		$	3,571
Cost of sales		644			742			830			959			1,087			1,241
Gross income		1,352			1,525			1,678			1,868			2,051			2,330
Depreciation		492			785			1,061			1,301			1,009			917
Interest expense		171			178			191			175			142			110
Operating expenses		212			239			270			306			334			374
Net income before tax		477			323			156			86			566			929
Provision for taxes		186			126			61			34			221			363
Net income after tax	$	291		$	197		$	95		$	52		$	345		$	566
Balance sheet
Total current assets		1,121			1,234			1,412			1,650			1,923			2,179
Gross property and equipment		4,180			5,149			6,410			7,449			8,200			9,016
Accumulated depreciation		868			1,654			2,714			4,015			5,024			5,941
Net property and equipment		3,312			3,495			3,696			3,434			3,176			3,075
Goodwill		1,069			1,069			1,069			1,069			1,069			1,069
Total assests		5,502			5,798			6,177			6,153			6,168			6,323
Accounts payable		104			77			91			110			117			135
Short-term debt		335			482			842			814			585			393
Current portion long-term debt		41			140			165			200			223			267
Accrued expenses		86			97			120			134			174			168
Total current liabilities		566			796			1,218			1,258			1,099			963
Long-term debt		1,694			1,554			1,389			1,189			966			699
Deferred taxes		335			334			370			454			505			496
Shareholders' equity		2,907			3,104			3,200			3,252			3,598			4,165
Total liabilities and equity	$	5,502		$	5,798		$	6,177		$	6,153		$	6,168		$	6,323
Free cash flows							$	(130	)	$	215		$	464		$	490

Use BSLs actual financial data for 2010 and its projections for 2011 to 2015 as shown above. Estimate the present value of BSLs free cash flow (in $ millions) for the years 2011 to 2015. The WACC of the acquiring firm (Macklemore) is 8.0 percent, BSLs WACC is 11.5 percent, and the average of the two companies WACCs, weighted by sales, is 8.2 percent.

(NOTE to instructor: for this question, you might choose to include the FCF for 2011 of $7 in the last row of the table above.)

Multiple Choice

• $726.68

• $720.58

• $743.94

• $1.29

• $628.79

• None of the options are correct.