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Suppose? Alcatel-Lucent has an equity cost of capital of 10
Suppose? Alcatel-Lucent has an equity cost of capital of 10.1%?, market capitalization of $12.48 ?billion, and an enterprise value of $16 billion. Assume? Alcatel-Lucent's debt cost of capital is 6.8 %6.8%?, its marginal tax rate is 36%?, the WACC is 8.84%?, and it maintains a constant? debt-equity ratio. The firm has a project with average risk. Expected free cash? flow, debt? capacity, and interest payments are shown in the? table:
Year 0 1 2 3
__________________________________________
FCF ($ million) -100 52 95 70
D=d*VL 40.10 32.10 14.15 0.00
interest 0.00 2.73 2.19 0.96
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.)
|
Year |
0 |
1 |
2 |
3 |
|
FCFE ?($ million) |
_____ |
_____ |
_____ |
_____ |
b. What is its NPV computed using the FTE? method? How does it compare with the NPV based on the WACC? method?
Expert Solution
Answer:
a)
FCFE = FCF - After tax Interest - Increase in Debt
FCFE0 = -100 + 40.1 - 0 = -59.9
FCFE1 = 52 + (32.1-40.1) - 2.73*(1-36%) = 42.25
FCFE2 = 95 + (14.15-32.1) - 2.19*(1-36%) = 75.65
FCFE3 = 70 + (0-14.15) - 0.96*(1-36%) = 55.24
b)
NPV =-59.9+ 42.25/(1+10.1%) + 75.65/(1+10.1%)2 + 55.24/(1+10.1%)3 = 82.27
WACC method
Firm value = 52/(1+8.84%) + 95/(1+8.84%)2 + 70/(1+8.84%)3 = 182.26
NPV = 182.26 - 100 = 82.26
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