5.) Suppose Lucent Technologies has an equity costof capital of 10%, market capitalization of $10.8 billion, and anenterprise value of $14.4 billion. Suppose Lucents debtcost of capital is 6.1% and its marginal tax rate is35%.

a.) What is Lucents WACC?

b.) If Lucent maintains a constant debt-equityratio, what is the value of a project with average risk and thefollowing free cash flows?

Year 0 1 2 3

FCF -100 50 100 70

c.) If Lucent maintains its debt-equity ratio, whatis the debt capacity of the project in part (b)?

d.) What is Lucents unlevered cost ofcapital?

e.) What is the unlevered value of theproject?

f.) What are the income tax shields from theproject? What is their present value?

g.) Show that the APV of Lucents projectmatches the value computed using the WACC method.

h.) What is the free cashflow to equity for this project?

i.) What is its NPV computed using the FTEmethod? How does it compare with the NPV based on the WACCmethod?