5·(20 pts) Suppose Lucent has cost of equity of 9%, equity market capita debt 4

Question

5·(20 pts) Suppose Lucent has cost of equity of 9%, equity market capita debt 4 billion and 0.4 billion of excess amount of cash. Suppose Lucent's cost of debt is 6% and its marginal tax rate is 35% (Note: Use Net Debt concept (ND) and leverage ratio-ND/IND-E)) lization of $10 billion, and total aquestion 1 (5pts): What is Lucent's WACC (after tax)? # Question 2 (Spts): If Lucent maintains a constant leverage ratio, what is the value of a project (levered value) with average risk based on the following expected free cash flows (Smillions) at each year? And perform NPV analysis. Note: WACC method (after-tax) Free Cash Flows: -120 (t-o), 60 (t-1), 100 (t-2), 80 (t 3) sauestion 3 (Spts): If Lucent maintains its leverage ratio, what is the debt capacity of the project at each year? Question 4 (5pts): Perform NPV analysis using APV method.

Explanation / Answer

WACC=9%*10/(10+4-0.4)+(4-0.4)/(10+4-0.4)*6%*(1-35%)=7.65%

Value=-120+60/1.0765+100/1.0765^2+80/1.0765^3=86.15649

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