Suppose Alcatel-Lucent has an equity cost of capital of 9.1%, market capitalization of $10.36 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 5.5%, its marginal tax rate is 34%, the WACC is 7.68%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year 1 2 FCFE ($ million) 0 3 Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 1 FCF ($ million) D=dxV² 45 39.60 Interest 2.62 0 - 100 47.64 0.00 Print Done 2 99 16.90 2.18 3 70 0.00 093 X
Suppose Alcatel-Lucent has an equity cost of capital of 9.1%, market capitalization of $10.36 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 5.5%, its marginal tax rate is 34%, the WACC is 7.68%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year 1 2 FCFE ($ million) 0 3 Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 1 FCF ($ million) D=dxV² 45 39.60 Interest 2.62 0 - 100 47.64 0.00 Print Done 2 99 16.90 2.18 3 70 0.00 093 X
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Suppose Alcatel-Lucent has an equity cost of capital of 9.1%, market capitalization of $10.36 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 5.5%, its marginal tax rate is 34%, the WACC is 7.68%, and it maintains a constant debt-equity ratio. The firm has a
project with average risk. Expected free cash flow , debt capacity, and interest payments are shown in the table:
a. What is the free cash flow to equity for this project?
b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method?
a. What is the free cash flow to equity for this project?
The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.)
Year
1
2
FCFE ($ million)
0
3
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Year
1
FCF ($ million)
D=dxV²
45
39.60
Interest
2.62
0
- 100
47.64
0.00
Print
Done
2
99
16.90
2.18
3
70
0.00
093
X
Transcribed Image Text:Suppose Alcatel-Lucent has an equity cost of capital of 9.1%, market capitalization of $10.36 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 5.5%, its marginal tax rate is 34%, the WACC is 7.68%, and it maintains a constant debt-equity ratio. The firm has a
project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table:
a. What is the free cash flow to equity for this project?
b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method?
a. What is the free cash flow to equity for this project?
The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.)
Year
1
2
FCFE ($ million)
0
3
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Year
1
FCF ($ million)
D=dxV²
45
39.60
Interest
2.62
0
- 100
47.64
0.00
Print
Done
2
99
16.90
2.18
3
70
0.00
093
X
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