Question
Suppose Alcatel-Lucent has an equity cost of capital of 9.7%, market capitalization of $10.35 billion, and an enterprise value of $15 billion. Suppose Alcatel-Lucent's debt
Suppose Alcatel-Lucent has an equity cost of capital of 9.7%, market capitalization of $10.35 billion, and an enterprise value of $15 billion. Suppose Alcatel-Lucent's debt cost of capital is 5.5% and its marginal tax rate is 33%.
a. What is Alcatel-Lucent's WACC?
b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the expected free cash flows as shown here,
| Year | 0 | 1 | 2 | 3 |
| FCF ($ million) | -100 | 51 | 98 | 68 |
c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part (b)?
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Introduction to Finance Markets, Investments and Financial Management
Authors: Ronald W. Melicher, Edgar A. Norton
16th edition
1119398282, 978-1-119-3211, 1119321115, 978-1119398288
