Suppose Alcatel-Lucent has an equity cost of capital of 9.5%, market capitalization of $11.84 billion, and an enterprise value of $16 billion. Assume Alcatel-Lucent's debt cost of capital is 6.8%, its marginal tax rate is 35%, the WACC is 8.18%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 2 FCF ($ million) 100 48 103 D=dxv Interest 49.21 0.00 C 40.75 3.35 17.31 2.77 3288 72 0.00 1.18 -X

Suppose Alcatel-Lucent has an equity cost of capital of 9.5%, market capitalization of $11.84 billion, and an enterprise value of $16 billion. Assume Alcatel-Lucent's debt cost of capital is 6.8%, its marginal tax rate is 35%, the WACC is 8.18%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 2 FCF ($ million) 100 48 103 D=dxv Interest 49.21 0.00 C 40.75 3.35 17.31 2.77 3288 72 0.00 1.18 -X

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Description: Suppose Alcatel-Lucent has an equity cost of capital of 9.5%, market capitalization of $11.84 billion, and anenterprise value of $16 billion. Assume Alcatel-Lucent's debt cost of capital is 6.8%, its marginal tax rate is 35%, theWACC is 8.18%, and i

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

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