Question

In: Finance

Year 0 1 2 3 FTF(Mil) -100 50 100 70 Suppose? Alcatel-Lucent has an equity cost...

Year 0 1 2 3 FTF(Mil) -100 50 100 70 Suppose? Alcatel-Lucent has an equity cost of capital of 10%?, market capitalization of $10.80 ?billion, and an enterprise value of $14.4 billion. Suppose? Alcatel-Lucent's debt cost of capital is 6.1% and its marginal tax rate is 35%.

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 risk and the expected free cash flows as shown? here,? c. If? Alcatel-Lucent maintains its? debt-equity ratio, what is the debt capacity of the project in part ?(b?)? . What is? Alcatel-Lucent's WACC? ?Alcatel-Lucent's WACC is ______%. ?(Round to two decimal? places.)

b. If? Alcatel-Lucent maintains a constant? debt-equity ratio, what is the value of a project with average risk and the expected free cash flows as shown? here, LOADING... ?? The NPV of the project is ?$________million.???(Round to two decimal? places.)

c. If? Alcatel-Lucent maintains its? debt-equity ratio, what is the debt capacity of the project in part ?(b?)? The debt capacity of the project in part ?(b?) is as? follows:???(Round to two decimal? places.) Year 0 1 2 3 Debt capacity ?$_______million ?$________million ?$_________million ?$_________million

Expert Solution

Answer a.

Given:

Enterprise value = $14.4 billion

Market capitalization = $10.80 ?billion

Proportion of equity in capital structure = 10.8 /14.4

Proportion of debt in capital structure = (14.4 - 10.8) /14.4

WACC = % Equity * Equity cost of capital + % debt * cost of capital * (1- Tax rate)

Hence WACC = (10.8 /14.4) * 10% + [(14.4 - 10.8) /14.4] * 6.1% * (1- 35%)

= 0.075 + 0.0099125

= 8.49%

Alcatel-Lucent's WACC is 8.49%

Answer b.

WACC = 8.49%

Given:

Year 0 1 2 3

FTF(Mil) -100 50 100 70

NPV of project = -100 + 50 / (1+8.49%) + 100 / (1+8.49%) ² + 70 / (1+ 8.49%) ³

= - 100 + 46.087 + 84.9612 + 54.8187

= 85.87

NPV of the project is ?$85.87 million.

Answer c:

Value of project at year 0= 46.087 + 84.9612 + 54.8187 = $185.87 million

Value of project at year 1 = 100 / (1+8.49%) + 70 / (1+ 8.49%) ² = $151.65 million

Value of project at year 2 = 70 / (1+8.49%) = $64.52 million

Value of project at year 3 = 0.00

Debt Equity ratio = (14.4 - 10.8) / 14.4 = 0.25

Debt capacity of the project in year 0 = $185.87 million * 0.25 = $46.47 million

Debt capacity of the project in year 1 = $151.65 million * 0.25 = $37.91 million

Debt capacity of the project in year 2 = $64.52 million * 0.25 = $16.13 million

Debt capacity of the project in year 3 = 0.00 * 0.25 = $0.00 million

Year	0	1	2	3
Debt capacity	$46.47 million	$37.91 million	$16.13 million	$0.00 million

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