Question
You are a consultant who has been hired to evaluate a new product line for Beaty Company. The upfront investment required to launch the product
You are a consultant who has been hired to evaluate a new product line for Beaty Company. The upfront investment required to launch the product line is $6
million. The product will generate free cash flow of $0.74
million the first year, and this free cash flow is expected to grow at a rate of 3% per year. Beaty Company has an equity cost of capital of 11.6%, a debt cost of capital of 7.44%, and a tax rate of 38%.
Beaty maintains a debt-equity ratio of 0.70.
a. What is the NPV of the new product line (including any tax shields from leverage)?
b. How much debt will Beaty 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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