Problem 1. Suppose Lucent Technologies has an equity cost of capital of 10%, market 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)?
The Business Plan:
Problem 2. Under the assumption that Ideko market share will increase by 0.5% per year, you determine that the plant will require an expansion in 2010. The cost of this expansion will be $15 million. Assuming the financing of the expansion will be delayed accordingly, calculate the projected interest payments and the amount of the projected interest tax shields through 2010.
Building the Financial Model:
Problem 3. Under the assumption that Ideko’s market share will increase by 0.5% per year (and the investment and financing will be adjusted as described in Problem 2), you project the following depreciation:
Year 2005 2006 2007 2008 2009 2010
Fixed Assets and Capital Investments ($000)
New Investment 5,000 5,000 5,000 5,000 5,000 20,000
Depreciation (5,500) (5,450) (5,405) (5,365) (5,328) (6,795)
Using this information, project net income through 2010 (that is, reproduce Table 19.7 under the new assumption)