You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment re
Posted: Sun Jul 03, 2022 12:54 pm
You are a consultant who has been hired to evaluate a newproduct line for Markum Enterprises. The upfront investmentrequired to launch the product line is $7 million. The product willgenerate free cash flow of $0.77 million the first year, andthis free cash flow is expected to grow at a rate of 4% per year.Markum has an equity cost of capital of 11.9%, a debt cost ofcapital of 6.45%, and a tax rate of 40%. Markum maintainsa debt-equity ratio of 0.60.
a. What is the NPV of the new product line (including anytax shields from leverage)?
b. How much debt will Markum initially take on as a result oflaunching this product line?
c. How much of the product line's value is attributable tothe present value of interest tax shields?
a. What is the NPV of the new product line (including anytax shields from leverage)?
b. How much debt will Markum initially take on as a result oflaunching this product line?
c. How much of the product line's value is attributable tothe present value of interest tax shields?