Suppose Alcatel-Lucent has an equity cost of capital of 9.9%, equity market capitalization of $10.8 billion, and an enterprise value of $13.5 billion. Alcatel-Lucents debt cost of capital is 6.9% and its marginal tax rate is 31%. Alcatel-Lucent maintains a constant debt-equity ratio, and is evaluating a project with average risk and the following expected free cash flows in millions of dollars.

A. What is the levered value of the project at Year 0 using the WACC method (in millions of dollars, rounded to two decimals)?

B. What is the unlevered value of the project at Year 0 using the APV method (in millions of dollars, rounded to two decimals)?

C. What is the levered value of the project, the debt capacity of the project, the interest payments, and the interest tax shields for each year? What is the present value of interest tax shields at Year 0 (in millions of dollars, rounded to two decimals)?

D. If Alcatel-Lucent kept the level of debt constant rather than maintain a constant debt-equity ratio for the project, what will the interest payments and interest tax shields be for each year? What will the present value of interest tax shields be at Year 0 (in millions of dollars, rounded to two decimals)?

Year 0 1 2 3 FCF -100 | 55 95 75 Year 0 1 2 3 FCF -100 | 55 95 75