5. Suppose Lucent Technologies has an equity cost of capital of 10%, marketd capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Lucent's debt cost of capital is 6.1% and its marginal tax rate is 35%.
a. What is Lucent's WACC?
b. If Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the following expected free cash flows?
Year 0 1 2 3
FCF -100 50 100 70
c. If Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part (b)?
9. Consider Lucent's project in Problem 5.
a. What is Lucent's unlevered cost of capital?
b. What is the value of the project?
c. What are the interest tax shields from the project? What is their present value?
d. Show that the APV of Lucent's project matches the value computed using the WACC method.
The solution explains project evaluation using NPV, APV and free cash flow to equity methods.