Year 0 1 2 3 FCF ($ million) -100 55 101 65

Suppose Alcatel-Lucent has an equity cost of capital of

10.9%,

market capitalization of

$11.68

billion, and an enterprise value of

$16

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

6%

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)?