You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $14 million. The product will generate free cash flow of $0.78 million the first year, and this free cash flow is expected to grow at a rate of 3% per year. Markum has an equity cost of capital of 11.8%, a debt cost of capital of 5.67%, and a tax rate of 42%. Markum maintains a debt-equity ratio of 0.40. a. What is the NPV of the new product line (including any tax shields from leverage)? b. How much debt will Markum initially take on as a result of launching this product line? c. How much of the product line's value is attributable to the present value of interest tax shields?

You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $14 million. The product will generate free cash flow of $0.78 million the first year, and this free cash flow is expected to grow at a rate of 3% per year. Markum has an equity cost of capital of 11.8%, a debt cost of capital of 5.67%, and a tax rate of 42%. Markum maintains a debt-equity ratio of 0.40. a. What is the NPV of the new product line (including any tax shields from leverage)? b. How much debt will Markum initially take on as a result of launching this product line? c. How much of the product line's value is attributable to the present value of interest tax shields?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 10E

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