(solution) Suppose Alcatel-Lucent has an equity cost of capital of 9.4

(solution) Suppose Alcatel-Lucent has an equity cost of capital of 9.4

Suppose Alcatel-Lucent has an equity cost of capital of 9.4 %9.4%, market capitalization of $ 11.20$11.20 billion, and an enterprise value of $ 16.0$16.0 billion with a debt cost of capital of 6.7 %6.7% and its marginal tax rate is 35 %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?

Year 0 1 2 3
FCF ($ million) negative 100?

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