Suppose Lucent has cost of equity of 9%, equity market capitalization of $10 billion, and total debt 4 billion and 0.4 billion of excess amount of cash. Suppose Lucent’s cost of debt is 6% and its marginal tax rate is 35%.
1. What is Lucent’s WACC?
2. If Lucent maintains a constant leverage ratio, what is the value of a project with average risk and the following expected free cash flows ($millions)? NPV analysis using WACC method
Free Cash Flows: -120 (t=0), 60 (t=1), 100 (t=2), 80 (t=3)
3. If Lucent maintains its leverage ratio, what is the debt capacity of the project in the previous question?
4. Perform NPV analysis using APV method using information from the previous questions.