Suppose Alcatel-Lucent has an equity cost of capital of 10.5%, market capitalization of $9.36 billion, and an enterprise value of $13 billion. Assume Alcatel-Lucent's debt cost of capital is 6.7%, its marginal tax rate is 34%, the WACC is 8.80%, 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: D 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 2 3 FCFE (S million)

Suppose Alcatel-Lucent has an equity cost of capital of 10.5%, market capitalization of $9.36 billion, and an enterprise value of $13 billion. Assume Alcatel-Lucent's debt cost of capital is 6.7%, its marginal tax rate is 34%, the WACC is 8.80%, 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: D 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 2 3 FCFE (S million)

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3P

See similar textbooks

Similar questions

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…
Widgets Inc has an expected EBIT of $64,000 in perpetuity and a tax rate of 35 percent. The firm has$95,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 15percent. What is the value of the firm according to M&M Proposition I with taxes? Should the companychange its debt–equity ratio if the goal is to maximize the value of the firm? Explain.
Suppose a firm has a EBIT of $450, Depreciation of $65, taxes of $50, change in NWC of $35, and net capital expenditures of $75. Its FCF are expected to grow constantly indefinitely. The firm has a retention rate of 60%, an ROE of 6.667%, and a WACC of 15%. What is the value of the firm? Assuming the firm's market value of debt is $1,350 and the firm has 98 shares outstanding, what is should the firm's stock price be? Should you buy the stock if it currently sells for $15 per stock?
You want to estimate the Weighted Average Cost of Capital (WACC) for Levi Inc. The company’s tax rate is 21% and it has the equity beta of 1.24. Its debt value is $2,304 million and the equity market value is $70,080 million. The company’s interest expense is $83 million. Assume that the risk-free rate is 5% and the market return is 12%. Based on the information, compute the WACC for Levi
Suppose the Widget Company has a capital structure composed of the following, in billions: Debt = Taka 30 million, Common equity = Taka 30 million. If the before-tax cost of debt is 9%, and the tax rate is 30%. The stock price of common share is Taka 30 in the last year the company paid a dividend of Taka 5 and it will grow at the rate of 5% for ever. What is Widget’s weighted average cost of capital? Now assume that company has a project that needs Taka 130 million and the company plans to maintain its present capital structure and needs to issue new common stocks and the flotation cost would be 15%. Using the concept of breakpoint estimate the new WACC for the company.
The Glexon mill has total assets of $91,600, current liabilities of $9,700, dividends paid of $2,000, net sales of $38,400, and net income of $5,400. Assume that all costs, assets, and current liabilities change spontaneously with sales. The tax rate and dividend payout ratios remain constant. If the firm's managers project a firm growth rate of 9 percent for next year, what will be the amount of external financing needed to support this level of growth? Assume the firm is currently operating at full capacity. Select one: a. EFN=6609$ b. EFN=3.609$ c. None of the other three answers d. EFN=3609$
Alpha Inc. has a target debt-to-value ratio of .6. The pretax cost of debt is 10 percent, the tax rate is 21 percent, and the unlevered cost of equity 14 percent. A project the firm is considering has a cash flow to the levered equity holders of $49,661 and an initial unborrowed cost of $220,000. What is the NPV of the project?
Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of 51.54 million per year, growing at a rate of 2.4% per year. Goodyear has an equity cost of capital of 8,7%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 38%, and a debt- equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt equity ratio, what after tax amount must it receive for the plant for the divestiture to be profitable?
Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $10 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 13%, a before-tax cost of debt of 10%, and a tax rate of 40%.The company’s retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $3, and the current stock price is $35.a. What is the company’s expected growth rate?b. If the firm’s net income is expected to be $1.1 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation 9.4 in Chapter 9.)
A firm has two independent projects, each requiring investment of INR 3 million, but each of these have different risk profiles, i.e., different costs of capital as below: Project A 17%, Project B 7% IRRs for A and B are 20% and 9% respectively. The firm would maintain a 30:70 debt-equity ratio and expects its net income to be 6 million INR. If this firms maintains a residual dividend policy (all cash distributed as dividends), what will be the pay-out ratio for this firm?
A firm with a corporatewide debt-to-equity ratio of 1:2,an after-tax cost of debt of 7%, and a cost of equity capital of 15% is interested in pursuing a foreign project. Thedebt capacity of the project is the same as for the company as a whole, but its systematic risk is such that therequired return on equity is estimated to be about 12%.The after-tax cost of debt is expected to remain at 7%.What is the project’s weighted average cost of capital? Howdoes it compare with the parent’s WACC?
Rolex, Inc. has equity with a market value of $20 million and debt with a market value of $10 million. Assume the firm has no default risk and can borrow at the risk-free interest rate. The risk-free interest rate is 5 percent per year, and the expected return on the market portfolio is 11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost of capital for an otherwise identical all-equity firm?