Question

Suppose Alcatel-Lucent has an equity cost of capital of 10.4%, market capitalization of $9.62 billion, and an enterprise value of $13 billion. Assume Alcatel-Lucent's debt cost of capital is 7.2%, its marginal tax rate is 35%, the WACC is 8.91%, 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?

Table Below

Answer 1

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All em - 9 W ? v L 1 ENG 08:34 17-03-2020 21 X . HR301 HK 279 280 fix HM HL HN HO HP HQ HR HS HT HU HV CALCULATION OF FCFE 283 284 285 YEAR DEBT 48.5 38.78 16.23 0 286 287 -100.0000 FCF AFTER TAX INTEREST EXPENSE INCREASE IN DEBT 100.0000 -1.8149 -22.5500 48.5000 54.0000 -2.2698 -9.7200 [38.78-48.50] 42.0102 288 289 290 291 68.0000 -0.7596 [interest*(1-t)] -16.2300 (0-16.23] 51.0104 FCFE -51.5000 75.6351 292 293 b 294 NPV = NPV = NPV = PV OF CF - INVESTMENT [42.0102/(1+0.104) 1 + 75.6351/(1+0.104)^2 + 51.0104/(1+0.104)^3] - 51.5 86.52 295 297 298 299 300 VALUE OF PROJECT USING WACC VALUE OF THE PROJECT = PV OF CF - INVESTMENT VALUE OF THE PROJECT = (54/(1+0.0891)^1 + 100/(1+0.0891)^2 + 68/(1+0.0891)^3 ) - 100 VALUE OF THE PROJECT = 86.53 (ROUNDING ERROR] BOTH HAVE SAME VALUE BOTH TALLIES 301 302 ... STOCK DIV NAV HEDGE FUND MF EV PEEPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS price quote LEVER... |