Question

Suppose Alcatel-Lucent has an equity cost of capital of 10.7 %,market capitalization of$ 10.50 billion, and an enterprise value of $15

billion. Suppose Alcatel-Lucent's debt cost of capital is 7.2 % and its marginal tax rate is 34 %

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,

Year 0 1 2 3

FCF ($ million) -100 52
104 72

c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part (b)?

Answer #1

Solution :-

(a)

After tax Cost of Debt = 7.2% * ( 1 - 0.34 ) = 4.752%

Cost of Equity = 10.7%

Equity Weight = $10.50 / $15 = 70%

Debt Weight = 1 - 0.70 = 0.30 = 30%

Now WACC = ( 4.752% * 0.30 ) + ( 10.7% * 0.70 )

= 8.92%

(b) Value = Present Value of Cash Inflows - Initial Cost

= [ $52 / ( 1 + 0.0892 ) ] + [ $104 / ( 1 + 0.0892 )^{2}
] + [ $72 / ( 1 + 0.0892 )^{3} ] - $100

= $191.14 - $100

= $91.14

(C)

Now Present Value of Cash flows

At Year 0 = [ $52 / ( 1 + 0.0892 ) ] + [ $104 / ( 1 + 0.0892
)^{2} ] + [ $72 / ( 1 + 0.0892 )^{3} ]

= $191.14

At Year 1 = [ $104 / ( 1 + 0.0892 ) ] + [
$72 / ( 1 + 0.0892 )^{2} ]

= $156.182

At Year 2 = [ $72 / ( 1 + 0.0892 ) ]

= $66.12

Now Debt Capacity Wd = VL* Weight of Debt

Year 0 = $191.14 * 30% = $57.342

Year 1 = $156.182 * 30% = $46.85

Year 2 = $66.12 * 30% = $19.83

If there is any doubt please ask in comments

Thank you please rate

6) Suppose Alcatel-Lucent has an equity cost of capital of
10%, market capitalization of $10.80 billion, and an enterprise
value of $14.4 billion. Suppose Alcatel-Lucent's debt cost of
capital is 6.1% and its marginal tax rate is 35%.
a. What is Alcatel-Lucent's WACC?
b. If Alcatel-Lucent maintains a constant debt-equity ratio,
what is the value of a project with average risk and the expected
free cash flows as shown here,
Year 0, 1, 2, 3
FCF ($ million) -100, 50,...

Suppose? Alcatel-Lucent has an equity cost of capital of 10.4
%?, market capitalization of $ 11.52 ?billion, and an enterprise
value of $ 16 billion. Assume? Alcatel-Lucent's debt cost of
capital is 6.1 %?, its marginal tax rate is 36 %?, the WACC is 8.58
%?, 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:
Year 0 1 2 3...

Your company has an equity cost of capital of 10%, debt cost of
capital of 6%, market capitalization of $10B, and an enterprise
value of $14B. Your company pays a corporate tax rate of 35%. Your
companymaintains a constant debt-to-equity ratio.
a)What is the (net) debt value of your company? (Hint:Net debt =
D–Excess cash)
b)What is the(net)debt-to-equity ratio of your company?
c)What is the unlevered cost of capital of your company?(Hint:When
a firm has a target leverageratio, its unlevered...

Suppose Goodyear Tire and Rubber Company has an equity cost of
capital of 8%, a debt cost of capital of 6.5%, a marginal
corporate tax rate of 32%, and a debt-equity ratio of 2.6. Assume
that Goodyear maintains a constant debt-equity ratio. a. What is
Goodyear's WACC? b. What is Goodyear's unlevered cost of
capital? c. Explain, intuitively, why Goodyear's unlevered cost
of capital is less than its equity cost of capital and higher than
its WACC

Suppose Goodyear Tire and Rubber Company has an equity cost of
capital of
8.18.1%,
a debt cost of capital of
6.66.6%,
a marginal corporate tax rate of
4545%,
and a debt-equity ratio of
3.13.1.
Assume that Goodyear maintains a constantdebt-equity ratio.
a. What is Goodyear's WACC?
b. What is Goodyear's unlevered cost of capital?
c. Explain, intuitively, why Goodyear's unlevered cost of
capital is less than its equity cost of capital and higher than its
WACC.

26) Calculate the enterprise value of a firm with a market
capitalization (market value of equity) of $80 Billion, market
value of debt of $29 billion, and $4 billion in cash and
equivalents. [ Note: Enter your answer in Billions; for example, if
you calculate the enterprise value to be $100 Billion, then enter
just 100 in the answer box.]
27) Calculate the NPV of an investment project that has an
upfront cost of $1,000,000, but produces ongoing benefits of...

In? mid-2015, Qualcomm Inc. had ?$11 billion in? debt, total
equity capitalization of ?$90 ?billion, and an equity beta of 1.44
?(as reported on? Yahoo! Finance). Included in? Qualcomm's assets
was ?$22 billion in cash and? risk-free securities. Assume that
the? risk-free rate of interest is 2.9 % and the market risk
premium is 3.9 % . a. What is? Qualcomm's enterprise? value? b.
What is the beta of? Qualcomm's business? assets? c. What is?
Qualcomm's WACC?
a. What is?...

Company A currently has market capitalization (value of its
equity) of $9,062.49 million, a debt-equity ratio of .1822, and a
WACC of 4.65%. The government of the country in which Company A
operates, Utopia, has no corporate taxes (T=0). The Firm has
decided it’s a good time to restructure its capital. It will buy
back some of its debt and issue new equity to achieve the
industry-average debt-equity ratio of 0.54. What will the Company’s
weighted average cost of capital...

Suppose Firm A has a 28% cost of equity capital and 10% before
tax cost of debt capital. The firm’s debt-to-equity ratio is 2.0.
Firm A is interested in investing in a telecom project that will
cost $1,000,000 and will provide $500,000 pretax annual earnings
for 5 years. Given the project is an extension of its core
business, the project risk is similar to the overall risk of the
firm. What is the net present value of this project if...

In December 2015, General Electric (GE) had a book value of
equity of $ 98.5 billion, 9.6 billion shares outstanding, and a
market price of $ 29.36 per share. GE also had cash of $ 103.6
billion, and total debt of $ 196.3 billion. a. What was GE's
market capitalization? What was GE's market-to-book ratio? b.
What was GE's book debt-equity ratio? What was GE's market
debt-equity ratio? c. What was GE's enterprise value?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 6 minutes ago

asked 7 minutes ago

asked 10 minutes ago

asked 26 minutes ago

asked 26 minutes ago

asked 28 minutes ago

asked 44 minutes ago

asked 46 minutes ago

asked 46 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago