Suppose Alcatel-Lucent has an equity cost capital of 10.4%,market capitalization

Question

Suppose Alcatel-Lucent has an equity cost capital of 10.4%,market capitalization of $9.49 billion,and an enterprise value of $13.0 billion with a debt cost of capital of 7.3% and its marginal tax rate is 36%.(a) What is Alcatel-Lucent's WACC? (b) If Alcatel-Lucent maintains a constant debt-equity ratio,what is the value of a project with average and the following expected free cash flows? Year---0----1----2---3 FCF(-100)--52--105---68.,What is the NPV? (c)If Alcatel-Lucent maintains its debt-equity ratio,what is the debt capacity of the project in part (b)? Round all answer to two decimal places.

Explanation / Answer

Answer:(a) WACC=(9.49/13)*10.4%+[(13-9.49)/13]*7.3%(1-0.36)

=7.592%+1.26144%

=8.85%

Answer:(b) Using the WACC method, the levered value of the project at date 0 is

VL =52/1.0885+105/(1.0885)2+68/(1.0885)3

=47.7722+88.620+52.7258

=189.12

Given a cost of 100 to initiate, the project’s NPV is 189.12 – 100 = 89.12.

Answer:(c) Lucent’s debt-to-value ratio is d = (13 –9.49) / 13 = 0.27. The project’s debt capacity is equal to d times the levered value of its remaining cash flows at each date:

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