Question
You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product
You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is
$ 14$14
million. The product will generate free cash flow of
$ 0.77$0.77
million the first year, and this free cash flow is expected to grow at a rate of
5 %5%
per year. Markum has an equity cost of capital of
11.3 %11.3%,
a debt cost of capital of
4.83 %4.83%,
and a tax rate of
42 %42%.
Markum maintains a debt-equity ratio of
0.700.70.
a. What is the NPV of the new product line (including any tax shields from leverage)?
b. How much debt will Markum initially take on as a result of launching this product line?
c. How much of the product line's value is attributable to the present value of interest tax shields?
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