Question

Suppose Alcatel-Lucent has an equity cost capital of 10.4%,market capitalization of $9.49 billion,and an enterprise value of $13.0 billion with a debt cost of capital of 7.3% and its marginal tax rate is 36%.(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 and the following expected free cash flows? Year---0----1----2---3 FCF(-100)--52--105---68.,What is the NPV? (c)If Alcatel-Lucent maintains its debt-equity ratio,what is the debt capacity of the project in part (b)? Round all answer to two decimal places.

Answer 1

WACC = 0.7308%
$123.354 billion
$33.435 billion

Step-by-step explanation:

(a) To calculate Alcatel-Lucent's weighted average cost of capital (WACC), we need to use the following formula:

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)

where:

E is the equity value (market capitalization)

V is the total value of the firm (enterprise value)

Re is the cost of equity

D is the debt value

Rd is the cost of debt

Tc is the corporate tax rate

Given information:

Equity cost of capital (Re) = 10.4%

Market capitalization (E) = $9.49 billion

Enterprise value (V) = $13.0 billion

Debt cost of capital (Rd) = 7.3%

Marginal tax rate (Tc) = 36%

Plugging in the values, we can calculate Alcatel-Lucent's WACC:

WACC = (9.49 / 13.0) * 0.104 + (3.51 / 13.0) * 0.073 * (1 - 0.36)

WACC = 0.7308%

(b) To calculate the net present value (NPV) of the project with the given expected free cash flows, we can discount the cash flows to present value using the WACC calculated in part (a):

Year 0: -100 / (1 + 0.007308)^0 = -100

Year 1: 52 / (1 + 0.007308)^1 = 51.932

Year 2: 105 / (1 + 0.007308)^2 = 104.424

Year 3: 68 / (1 + 0.007308)^3 = 66.998

Adding up the present value of the cash flows, we get:

NPV = -100 + 51.932 + 104.424 + 66.998 = 123.354

So the net present value (NPV) of the project is $123.354 billion.

(c) To calculate the debt capacity of the project while maintaining the debt-equity ratio, we can use the following formula:

Debt Capacity = (D/V) * NPV

where:

D is the debt value

V is the total value of the firm (enterprise value)

NPV is the net present value of the project

Plugging in the values, we can calculate the debt capacity of the project:

Debt Capacity = (3.51 / 13.0) * 123.354 = 33.435

So the debt capacity of the project, while maintaining the debt-equity ratio, is $33.435 billion.