Question

Suppose Alcatel-Lucent has an equity cost of capital of 10.9%, market capitalization of $10.08 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 6.3%, its marginal tax rate is 36%, the WACC is 8.98%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: E: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) 0 1 2 3 Year FCFE ($ million) b. What is its NPV computed using the FTE method? NPV is $ million. (Round to two decimal places.) How does compare with the NPV based on the WACC method? (Select the best choice below.) O A. The NPV computed using the FTE method is the same as the NPV based on the WACC method. OB. The NPV computed using the FTE method is always lower than the NPV based on the WACC method. OC. The NPV computed using the FTE method cannot be compared to the NPV based on the WACC method. OD. The NPV computed using the FTE method is always higher than the NPV based on the WACC method.

Answer 1

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09:15 C w ENG 12-06-2020 26 Х HS403 fx . HK HL HM HN HO HP HQ HR HS HT HU HV 381 CALCULATION OF FCFE 382 383 384 385 386 YEAR 0 1 3 2 17.21 DEBT 49.72 40.46 0 387 FCF - 100.0000 49.0000 -2.0047 AFTER TAX INTEREST EXPENSE 388 389 390 INCREASE IN DEBT 49.7200 -9.2600 [40.46-49.72] 37.7353 96.0000 -1.6313 -23.2500 [17.21-40.46] 71.1187 67.0000 -0.6939 [interest* (1-t)] -17.2100 [0-17.21] 49.0961 391 a FCFE -50.2800 b NPV = NPV = 392 393 394 395 396 397 398 PV OF FCFE - INVESTMENT [37.7353/(1+0.109)^1 + 71.1187/(1+0.109)^2 + 49.0961/(1+0.109)^3] - 50.28 77.57 NPV = VALUE OF PROJECT USING WACC VALUE OF THE PROJECT = PV OF FCF - INVESTMENT VALUE OF THE PROJECT = [49/(1+0.0891)^1 + 96/(1+0.0898)^2 + 67/(1+0.0898)^3 ] - 100 VALUE OF THE PROJECT = 77.56 [ROUNDING ERROR] 399 400 401 402 403 404 OPTION A BOTH HAVE SAME VALUE HIGH LOW TARGET PRICE STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB PS ROPI AF ... +