Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 18, Problem 6P
Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent’s debt cost of capital is 6.1% and its marginal tax rate is 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 ?
- c. If Alcatel-Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part b?
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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…
Give typing answer with explanation and conclusion
Suppose Abraxas Corp. has an equity cost of capital of 8.2%, market capitalization of $11.37 billion, and an enterprise value of $17.12 billion. Suppose Abraxas's debt cost of capital is 5.6% and its marginal tax rate is 21%. What is Abraxas's WACC?
Using the WACC in practice: Maloney’s, Inc., has found that its cost of common equity capital is 17 percent and its cost of debt capital is 6 percent. If the firm is financed with $3,000,000 of common shares (market value) and $2,000,000 of debt, then what is the after-tax weighted average cost of capital for Maloney’s if it is subject to a 40 percent marginal tax rate?
8.96%
11.16%
11.64%
12.60%
Chapter 18 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 18.1 - What are the three methods we can use to include...Ch. 18.1 - Prob. 2CCCh. 18.2 - Prob. 1CCCh. 18.2 - Prob. 2CCCh. 18.3 - Prob. 1CCCh. 18.3 - Prob. 2CCCh. 18.4 - Prob. 1CCCh. 18.4 - Prob. 2CCCh. 18.5 - How do we estimate a projects unlevered cost of...Ch. 18.5 - What is the incremental debt associated with a...
Ch. 18.6 - Prob. 1CCCh. 18.6 - Prob. 2CCCh. 18.7 - How do we deal with issuance costs and security...Ch. 18.7 - Prob. 2CCCh. 18.8 - When a firm has pre-determined tax shields, how do...Ch. 18.8 - Prob. 2CCCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - In 2015, Intel Corporation had a market...Ch. 18 - Prob. 4PCh. 18 - Suppose Goodyear Tire and Rubber Company is...Ch. 18 - Suppose Alcatel-Lucent has an equity cost of...Ch. 18 - Acort Industries has 10 million shares outstanding...Ch. 18 - Prob. 8PCh. 18 - Prob. 9PCh. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - In year 1, AMC will earn 2000 before interest and...Ch. 18 - Prokter and Gramble (PKGR) has historically...Ch. 18 - Amarindo, Inc. (AMR), is a newly public firm with...Ch. 18 - Remex (RMX) currently has no debt in its capital...Ch. 18 - You are evaluating a project that requires an...Ch. 18 - Prob. 17PCh. 18 - You are on your way to an important budget...Ch. 18 - Your firm is considering building a 600 million...Ch. 18 - Prob. 20PCh. 18 - DFS Corporation is currently an all-equity firm,...Ch. 18 - Prob. 22PCh. 18 - Prob. 23PCh. 18 - Prob. 24PCh. 18 - XL Sports is expected to generate free cash flows...Ch. 18 - Propel Corporation plans to make a 50 million...Ch. 18 - Gartner Systems has no debt and an equity cost of...Ch. 18 - Revtek, Inc., has an equity cost of capital of 12%...
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- A company had WACC (weighted average cost of capital) equal to 8. % If the company pays off mortgage bonds with an interest rate of 4% and issues an equal amount of new stock considered to be relatively risky by the market, which of the following is true? a. residual income will increase. b. ROI will decrease. c. WACC will increase. d. WACC will decrease.arrow_forwardSuppose the weighted average cost of capital of the Oriole Company is 10 percent. If Oriole has a capital structure that is 50 percent debt and 50 percent equity, its before-tax cost of debt is 7 percent, and its marginal tax rate is 20 percent, then its cost of equity capital is closest to: a. 10.40 percent. b. 12.40 percent. c. 8.40 percent. d. 14.40 percent.arrow_forward
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