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 $0.76 million the first year, and this free cash flow is expected to grow at a rate of 4% per year. Markum has an equity cost of capital of 11.6% , a debt cost of capital of 7.51%, and a tax rate of 22%. Markum 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 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?
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 $0.76 million the first year, and this free cash flow is expected to grow at a rate of 4% per year. Markum has an equity cost of capital of 11.6% , a debt cost of capital of 7.51%, and a tax rate of 22%. Markum 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 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?
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
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![K
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 $0.76 million
the first year, and this free cash flow is expected to grow at a rate of 4% per year. Markum has an equity cost of capital
of 11.6%, a debt cost of capital of 7.51%, and a tax rate of 22 %. Markum 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 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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F87259214-9e68-46e6-b7fa-944556aac52a%2F4c357b17-84b9-4efe-b499-4df442c04e55%2Fj0kvaxd_processed.jpeg&w=3840&q=75)
Transcribed Image Text:K
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 $0.76 million
the first year, and this free cash flow is expected to grow at a rate of 4% per year. Markum has an equity cost of capital
of 11.6%, a debt cost of capital of 7.51%, and a tax rate of 22 %. Markum 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 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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