Suppose Alcatel-Lucent has an equity cost of capital of 10

Accounting Dec 15, 2020

Suppose Alcatel-Lucent has an equity cost of capital of 10.4%. market capitalization of 59.88 billion. and an enterprise value of $13 billion. Assume Alcatel-Lucent's debt cost of capital is 5.6%. its marginal tax rate is 37%. the WACC is 8.75%. and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow. debt capacity. and interest payments are shown in the table:
Year 0 1 2 3
FCF ($ million) -100 52 99 67
D=dxVL 44.07 35.45 14.79 0.00
Interest 0.00 2.47 1.99 0.83

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?

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