Use BSL's actual financial data for 2010 and its projections for 2011 to 2015 as shown above.Estimate BSL's value (in $ millions)at the end of 2010 assuming that in the years after 2015 the company's free cash flow grows 4 percent per year in perpetuity.The WACC of the acquiring firm (Macklemore)is 8.0 percent,BSL's WACC is 11.5 percent,and the average of the two companies' WACCs,weighted by sales,is 8.2 percent.

Question

Quizplus · Accepted Answer

1. First, we need to find BSL's free cash flows for the years 2010 to 2015. We can do this by subtracting capital expenditures from operating cash flows:
- 2010: $283 - $168 = $115 million
- 2011: $309 - $207 = $102 million
- 2012: $354 - $237 = $117 million
- 2013: $384 - $257 = $127 million
- 2014: $408 - $273 = $135 million
- 2015: $426 - $287 = $139 million

2. Next, we need to calculate the terminal value of BSL based on its free cash flow in 2015. We can use the perpetuity formula:
PV = FCF / (WACC - g)
where PV is the present value of the terminal value, FCF is the free cash flow in 2015, WACC is the weighted average cost of capital, and g is the expected growth rate in free cash flow in perpetuity.

Since the question tells us that the free cash flow is expected to grow at 4% per year, we can use that as our expected growth rate. We also need to use the weighted average cost of capital of 8.2%, since this is the cost of capital that reflects the combined risk of the two companies. Therefore, we have:

PV = $139 / (8.2% - 4%) = $3,481.25 million

3. Finally, we need to find the total enterprise value (EV) of BSL at the end of 2010. We can use the free cash flow to the firm (FCFF) valuation method since we are assuming that BSL has no debt. Therefore, the EV is equal to the PV of free cash flows from 2011 to 2015 plus the PV of the terminal value, discounted using the WACC of Macklemore, the acquiring firm (8%):

EV = (102 / 1.082) + (117 / 1.082²) + (127 / 1.082³) + (135 / 1.082⁴) + (139 / 1.082⁵) + ($3,481.25 / 1.08⁶) = $4,571.49 million

Therefore, the best choice is B) $4,571.49.

Use BSL's Actual Financial Data for 2010 and Its Projections