Suppose Alcatel-Lucent has an equity cost of capital of

10.1%,

market capitalization of

$8.97

billion, and an enterprise value of

$13

billion. Suppose Alcatel-Lucent's debt cost of capital is

5.7%

and its marginal tax rate is

37%.

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,

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?

c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part

(b)?

Year 1 2 3 FCF ($ million) 0 - 100 55 97 72