In: Finance
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
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 |