Suppose? Alcatel-Lucent has an equity cost of capital of 9.5%?, market capitalization of $10.14 ?billion, and an enterprise value of $13 billion. Assume? Alcatel-Lucent’s debt cost of capital is 7.3%?, its marginal tax rate is 32%?, the WACC is 8.50%?, and it maintains a constant? debt-equity ratio. The firm has a project with average risk. Expected free cash? flow, debt? capacity, and interest payments are shown in the? table:
|
Year |
0 |
1 |
2 |
3 |
|---|---|---|---|---|
|
FCF ?($ million) |
-100 |
46 |
104 |
70 |
|
D=d×VL |
40.82 |
34.17 |
14.19 |
0.00 |
|
Interest |
0.00 |
2.98 |
2.49 |
1.04 |
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?
