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 $ 12 million.

The product will generate free cash flow of $ 0.78 million the first year, and this free cash flow is expected to grow at a rate of 5 % per year.

Markum has an equity cost of capital of 11.1 %, a debt cost of capital of 8.09 %, and a tax rate of 35 %. Markum maintains a debt-equity ratio of 0.80.

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?

yes. it is a perpetuity.