Suppose Alcatel-Lucent has an equity cost of capital of

9.7%,

market capitalization of

$10.08

billion, and an enterprise value of

$14

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

5.7%

and its marginal tax rate is

38%.

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)?

Question content area bottom

Part 1

a. What is Alcatel-Lucent's WACC?

Alcatel-Lucent's WACC is

X

(Round to two decimal places.)

40

50

60

70

80

90

PV (interest tax shield, $ million)

0.00

0.76

0.95

1.14

1.33

1.52

1.71

Probability of Financial Distress

0%

0%

1%

2%

7%

16%

31%

. Suppose the firm has a beta of zero, so that the appropriate discount rate for financial distress costs is the risk-free rate of

5%.

Which level of debt above is optimal if, in the event of distress, the firm will have distress costs equal to a.

$2

million?b.

$5

million?c.

$25

million?

Question content area bottom

Part 1

a.

$2

million?If distress costs are equal to

$2

million, the optimal level of debt is

$enter your response here

million. (Round to the nearest integer.)