Suppose Luccent has cost of equity 9%, equity market capitalization of $10 billion, and total debt 4 billion and 0.4 billion of excess amount of cash. Suppose Luccent's cost of debt is 6% and its marginal tax rate is 35%. (Note: Use debt concept (ND) and leverage ratio = ND/(ND+E)).
Question 1: What is Luccent's WACC (after tax)?
Question 2: If Luccent maintains a constant leverage ratio, what is the value of a project (levered value) with average risk based on the following expected free cash flows ($millions) at each year? And perfirm NPV analysis using WACC method (after-tax)
Free cash flows: -120 (t=0), 60 (t=1), 100 (t=2), 80 (t=3)
Question 3: If Luccent maintains its leverage ratio, what is the debt capacity of the project at each year?
Question 4: Perform NPV analysis using APV method.