Suppose Alcatel-Lucent has an equity cost of capital of 10.7%, market capitaliza
ID: 2792879 • Letter: S
Question
Suppose Alcatel-Lucent has an equity cost of capital of 10.7%, market capitalization of $9.80 billion, and an enterprise value of $14 billion. Suppose Alcatel-Lucent's debt cost of capital is 6.9% and its marginal tax rate is 34% a. What is Alcatel-Lucent's WACC? Alcatel-Lucent's WACC is 8.86% (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? Year---0----1----2---3 FCF(-100)--54--99---67.,What is the NPV? b. The NPV of the project is 85.08 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) Round to two decimal places.) Year 0 1 2 3 Debt Capacity ? million ?million ?million ?million I have parts A & B down, how do you solve for part C?
Explanation / Answer
Value in year 0 = 54 / 1.0886 + 99 / 1.0886^2 + 67 / 1.0886^3 = 185.08 million
Value in year 1 = 99 / 1.0886 + 67 / 1.0886^2 = 147.48 million
Value in year 2 = 67 / 1.0886 = 61.55 million
Value in year 3 = 0
As the debt ratio, wd = 30%
Debt Capacity = Debt Ratio x Firm Value
In year 0, Debt Capacity = 185.08 x 30% = 55.52
In year 1, Debt Capacity = 147.48 x 30% = 44.24
In year 2, Debt Capacity = 61.55 x 30% = 18.46
In year 3, Debt Capacity = 0 x 30% = 0
Alcatel 0 1 2 3 FCF -100 54 99 67 Value (WACC) $185.08 $147.48 $61.55 $0.00 Debt Capacity $55.52 $44.24 $18.46 $0.00Related Questions
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