(a) You are a consultant who was hired to evaluate a new product line for ABB Enterprises. The upfront investment required to launch the product line is $10 million. The product will generate free cash flow of $750,000 the first year, and this free cash flow is expected to grow at a rate of 4% per year. ABB has an equity cost of capital of 11.3%, a debt cost of capital of 4.33%, and a tax rate of 25%. ABB maintains a debt-equity ratio of 0.40. (i) What is the Net Present Value (NPV) of the new product line (including any tax shields from leverage)? [20 marks] (ii) How much debt will ABB initially take on as a result of launching this product line? [15 marks] (iii) How much of the product line's value is attributable to the present value of interest tax shields? [15 marks] (b) BDC has historically maintained a debt-equity ratio of approximately 0.20. Its current stock price is $50 per share, with 2.5 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.50 and can borrow at 4.20%, just 20 basis points over the risk-free rate of 4%. The expected return of the market is 10%, and BDC's tax rate is 25%. (i) This year, BDC is expected to have free cash flows of $6.0 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? [20 marks] (ii) BDC believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.50, it believes its borrowing costs will rise only slightly to 4.50%. If BDC announces that it will raise its debt-equity ratio to 0.5 through a leveraged recap, determine the increase in the stock price that would result from the anticipated tax savings. [30 marks]