Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 18, Problem 6P
Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent’s debt cost of capital is 6.1% and its marginal tax rate is 35%.
- a. What is Alcatel-Lucent’s WACC?
- b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the following expected
free cash flows ?
- c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part b?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose Alcatel-Lucent has an equity cost of capital of 9.2%, market capitalization of $10.95 billion, and an enterprise value of $15 billion. Suppose Alcatel-Lucent's debt cost of capital is 6.9% and its marginal tax rate is 38%.
a. What is Alcatel-Lucent's WACC?
b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the expected free cash flows as shown here,?
c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part (b)?
a. What is Alcatel-Lucent's WACC?
Alcatel-Lucent's WACC is%. (Round to two decimal places.)
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Year
0
1
FCF ($ million)
- 100
50
Print
C
Done
2
99
3
66
X
Suppose Alcatel-Lucent has an equity cost of capital of 10.4%, market capitalization of $11.52 billion, and an enterprise value of $16 billion. Suppose Alcatel-Lucent's debt cost of capital is 6.6% and its marginal tax rate is 34%.
a. What is Alcatel-Lucent's WACC?
b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the expected free cash flows as shown here, ?
c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part (b)?
a. What is Alcatel-Lucent's WACC?
Alcatel-Lucent's WACC is 9.34 %. (Round to two decimal places.)
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Year
1
FCF ($ million)
45
Print
0
- 100
Done
2
101
3
66
- X
Ch 18)
Suppose Alcatel-Lucent has an equity cost of capital of 10.1%, market capitalization of $11.52 billion, and an enterprise value of $16 billion. Suppose Alcatel-Lucent's debt cost of capital is 5.7% and its marginal tax rate is 33%
a. What is Alcatel-Lucent's WACC?
b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the expected free cash flows as shown here,
c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part (b)?
a. What is Alcatel-Lucent's WACC?
Alcatel-Lucent's WACC is 8.34 % (Round to two decimal places.)
b. If Alcatel-Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the expected free cash flows as shown here,
The NPV of the project is $87.51 million. (Round to two decimal places.)
c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part (b)?
The debt capacity of the…
Chapter 18 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 18.1 - What are the three methods we can use to include...Ch. 18.1 - Prob. 2CCCh. 18.2 - Prob. 1CCCh. 18.2 - Prob. 2CCCh. 18.3 - Prob. 1CCCh. 18.3 - Prob. 2CCCh. 18.4 - Prob. 1CCCh. 18.4 - Prob. 2CCCh. 18.5 - How do we estimate a projects unlevered cost of...Ch. 18.5 - What is the incremental debt associated with a...
Ch. 18.6 - Prob. 1CCCh. 18.6 - Prob. 2CCCh. 18.7 - How do we deal with issuance costs and security...Ch. 18.7 - Prob. 2CCCh. 18.8 - When a firm has pre-determined tax shields, how do...Ch. 18.8 - Prob. 2CCCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - In 2015, Intel Corporation had a market...Ch. 18 - Prob. 4PCh. 18 - Suppose Goodyear Tire and Rubber Company is...Ch. 18 - Suppose Alcatel-Lucent has an equity cost of...Ch. 18 - Acort Industries has 10 million shares outstanding...Ch. 18 - Prob. 8PCh. 18 - Prob. 9PCh. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - In year 1, AMC will earn 2000 before interest and...Ch. 18 - Prokter and Gramble (PKGR) has historically...Ch. 18 - Amarindo, Inc. (AMR), is a newly public firm with...Ch. 18 - Remex (RMX) currently has no debt in its capital...Ch. 18 - You are evaluating a project that requires an...Ch. 18 - Prob. 17PCh. 18 - You are on your way to an important budget...Ch. 18 - Your firm is considering building a 600 million...Ch. 18 - Prob. 20PCh. 18 - DFS Corporation is currently an all-equity firm,...Ch. 18 - Prob. 22PCh. 18 - Prob. 23PCh. 18 - Prob. 24PCh. 18 - XL Sports is expected to generate free cash flows...Ch. 18 - Propel Corporation plans to make a 50 million...Ch. 18 - Gartner Systems has no debt and an equity cost of...Ch. 18 - Revtek, Inc., has an equity cost of capital of 12%...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Give typing answer with explanation and conclusion Suppose Abraxas Corp. has an equity cost of capital of 8.2%, market capitalization of $11.37 billion, and an enterprise value of $17.12 billion. Suppose Abraxas's debt cost of capital is 5.6% and its marginal tax rate is 21%. What is Abraxas's WACC?arrow_forwardSuppose Goodyear Tire and Rubber Company has an equity cost of capital of 7.9%, a debt cost of capital of 6.4%, a marginal corporate tax rate of 21%, and a debt-equity ratio of 2.7. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. a. What is Goodyear's WACC? The WACC is %. (Round to two decimal places.)arrow_forwardSuppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.1%, a debt cost of capital of 6.6%, a marginal corporate tax rate of 22%, and a debt-equity ratio of 2.5. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. Question content area bottom a. What is Goodyear's WACC? The WACC is enter your response here%. (Round to two decimal places.)arrow_forward
- Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.6%, a debt cost of capital of 7.1%, a marginal corporate tax rate of 24%, and a debt-equity ratio of 2.5. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. Question content area bottom Part 1 a. What is Goodyear's WACC? The WACC is enter your response here%. (Round to two decimal places.)arrow_forwardSuppose Alcatel-Lucent has an equity cost of capital of 10.3%, market capitalization of $9.36 billion, and an enterprise value of $13 billion. Assume that Alcatel-Lucent's debt cost of capital is 7.3%, its marginal tax rate is 34%, the WACC is 8.7650%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. The expected free cash flow, levered value, and debt capacity are as follows: Thus, the NPV of the project calculated using the WACC method is $182.73 million - $100 million = $82.73 million. a. What is Alcatel-Lucent's unlevered cost of capital? b. What is the unlevered 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 Alcatel-Lucent's project matches the value computed using the WACC method. a. What is Alcatel-Lucent's unlevered cost of capital? Alcatel-Lucent's unlevered cost of capital is%. (Round to four decimal places.) Data table (Click on the following icon in…arrow_forwardSuppose Alcatel-Lucent has an equity cost of capital of 9.5%, market capitalization of $11.84 billion, and an enterprise value of $16 billion. Assume Alcatel-Lucent's debt cost of capital is 6.8%, its marginal tax rate is 35%, the WACC is 8.18%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? Data table af (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 2 100 48 103 FCF ($ million) D=dxV 49.21 40.75 Interest 0.00 3.35 17.31 2.77 3 72 0.00 1.18 - Xarrow_forward
- Suppose Alcatel-Lucent has an equity cost of capital of 9.1%, market capitalization of $10.36 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 5.5%, its marginal tax rate is 34%, the WACC is 7.68%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year 1 2 FCFE ($ million) 0 3 Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 1 FCF ($ million) D=dxV² 45 39.60 Interest 2.62 0 - 100 47.64 0.00 Print Done 2 99…arrow_forwardSuppose Alcatel-Lucent has an equity cost of capital of 10.2%, market capitalization of $11.20 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 6.5%, its marginal tax rate is 33%, the WACC is 9.03%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year FCF ($ million) D=dxv Interest 0 1 2 3 - 100 55 103 74 38.84 31.34 13.57 0.00 0.00 2.52 2.04 0.88 toarrow_forwardSuppose Alcatel-Lucent has an equity cost of capital of 10.3%, market capitalization of $11.20 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 6.5%, its marginal tax rate is 32%, the WACC is 9.12%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year FCFE ($ million) 0 1 2 3arrow_forward
- A firm wants a sustainable growth rate of 3.68 percent while maintaining a dividend payout ratio of 38 percent and a profit margin of 7 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired ratearrow_forwardA firm wants a sustainable growth rate of 2.73 percent while maintaining a dividend payout ratio of 39 percent and a profit margin of 6 percent. The firm has a capital intensity ratio of 2. What is the debt-equity ratio that is required to achieve the firm's desired rate of growth?arrow_forwardSuppose Woodsburg’s capital structure is 60% equity and 40% debt, and that its marginal tax rate increases. What will happen to Woodsburg’s weighted average cost of capital (WACC)?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Discounted cash flow model; Author: Edspira;https://www.youtube.com/watch?v=7PpWneOBJls;License: Standard YouTube License, CC-BY