Question:

You are a consultant who was hired to evaluate a new product line for a company.The upfront required to launch the product line is $10 million. The product will generate free cash flow of $750000 the first year, and this free cash flow is expected to grow at a rate of 4 per year. This company has an equity cost of capital of 11.3% a debt cost of 5%, and a tax rate of 35%.This company maintains a debt-equity ratio of 4.0.

Problem:

1. How much debt will the firm initially take on as a result of launching this product line