Question 4:The Dj Vu Corporation is evaluating a new product line. The line would require an investment of $ 5,000,000 today. The product will generate a free cash flow of $ 500,000 after the first year. The free cash flow is expected to grow at 2% per year in perpetuity. The DejaVu Corporation'shas an equity cost of capital of 12.6%, a debt cost of capital of 6% and it is subject to 20% tax rate. The DejaVu policy is to maintain a constant debt to equity ratio of 0.50.

Question 4 Part a:

Based on the information in the problem, calculate how much debt must DejaVu borrow at time 0 when it undertakes the project. (show your calculations and assumptions to get credit) (answer should use one page maximum) (answer in dollars, not millions of dollars)

Question 4 Part b:Based on the information in the problem and your calculations in part a, how much of the value of the product line is due to the interest tax shield? (show your calculations and assumptions to get credit) (answer should use one page maximum) (answer in dollars, not millions of dollars)

Question 4 Part c: Suppose DejaVu changed its mind and decided to finance the project only with equity. Based on the information in the problem and your calculations in part a and part b, should DejaVu undertake the project: (choose the one most correct answer)

a. Yes

b. No