Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose Alcatel-Lucent has an equity cost of capital of 10.1%, market capitalization of $9.62 billion, and an enterprise value of $13 billion. Assume Alcatel-Lucent's debt

Suppose Alcatel-Lucent has an equity cost of capital of 10.1%, market capitalization of $9.62 billion, and an enterprise value of $13 billion. Assume Alcatel-Lucent's debt cost of capital is 6.9%, its marginal tax rate is 35%, the WACC is 8.64%, 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:

Year

0

1

2

3

FCF ($ million)

100

54

97

69

D=dVL

48.28

38.42

16.51

0.00

Interest

0.00

3.33

2.65

1.14

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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cases In Financial Reporting

Authors: Ellen Engel, D. Eric Hirst, Mary Lea McAnally

8th Edition

1618531220, 9781618531223

More Books

Students also viewed these Finance questions