Question
Assume that you are analyzing whether Facebook should introduce a new smartphone. Based upon your estimates of the cash flows from the phone, you estimate
Assume that you are analyzing whether Facebook should introduce a new smartphone. Based upon your estimates of the cash flows from the phone, you estimate a net present value of -$500 million. However, you believe that the phone will increase advertising revenues on Facebook by $90 million next year, growing 1.5% in perpetuity. The cost of capital for smartphones is 13%, the cost of capital for the advertising business is 11% and the marginal tax rate is 35%. What is the net value effect to Facebook of introducing the smartphone?
a.
115.79 million
b.
-247.37 million
c.
21 million
d.
-44 million
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