UNIVERSITY / INSTITUTE: Strayer University
CLASS / COURSE: FIN 534
5. 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)?
9. Consider Lucent’s project in Problem 5.
a. What is Lucent’s unlevered cost of capital?
b. What is the unlevered value of the project?
c. What are the interest tax shields from the project? What is their present value?
d. Show that the APV of Lucent’s project matches the value computed using the WACC method.
10. Consider Lucent’s project in Problem 5
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?
3. 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 (assuming that the interest rates on the term loans remain the same as in the chapter) through 2010.
4. Under 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 3), you project the following depreciation:
Year 2005 2006 2007 2008 2009 2010
Fixed Assets and Capital Investment ($000)
2. New Investment 5,000 5,000 5,000 5,000 5,000 20,000
3. Depreciation (5,500) (5,450) (5,450) (5,365) (5,328) (6,795)
Using this information, project net income through 2010 (that is, reproduce Table 19.7 under the new assumptions).
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SUBJECTS / CATEGORIES:
2. Financial Management
4. Corporate Finance