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
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
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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 line is
free cash flow of
$8
million. The product will generate $0.70
million the first year, and this free cash flow is expected to grow at a rate of
6%
per year. Markum has an equity cost of capital of
10.8%,
a debt cost of capital of
6.38%,
and a tax rate of
25%.
Markum maintains a debt-equity ratio of
0.50.
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?
Question content area bottom
Part 1
a. What is the NPV of the new product line (including any tax shields from leverage)?
The NPV of the new product line is
million. (Round to two decimal places.)
Part 2
b. How much debt will Markum initially take on as a result of launching this product line?
Debt will be
$enter your response here
million. (Round to two decimal places.)Expert Solution
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Step 1: Concept of Net Present Value
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VIEWStep 3: Computation of the debt to be paid initially as a result of launching the product line
VIEWStep 4: Calculation of the product line's value attributable to the present value of interest tax shields
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