Question
Suppose Alcatel-Lucent has an equity cost of capital of 10.1%, market capitalization of $12.48 billion, and an enterprise value of $16 billion. Assume Alcatel-Lucent's debt
Suppose Alcatel-Lucent has an equity cost of capital of 10.1%, market capitalization of $12.48 billion, and an enterprise value of $16 billion. Assume Alcatel-Lucent's debt cost of capital is 6.8 %6.8%, its marginal tax rate is 36%, the WACC is 8.84%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table:
Year 0 1 2 3
__________________________________________
FCF ($ million) -100 52 95 70
D=d*VL 40.10 32.10 14.15 0.00
interest 0.00 2.73 2.19 0.96
a. What is the free cash flow to equity for this project?
The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.)
Year | 0 | 1 | 2 | 3 |
FCFE ($ million) | _____ | _____ | _____ | _____ |
b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method?
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