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 $ 11 million. The product will generate free cash flow of $ 0.73 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 11.7 %, a debt cost of capital of 5.79 %, and a tax rate of 26 %. Markum maintains a debt - equity ratio of 0.90. 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 $ 11 million. The product will generate free cash flow of $ 0.73 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 11.7 %, a debt cost of capital of 5.79 %, and a tax rate of 26 %. Markum maintains a debt - equity ratio of 0.90. 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?
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 8P
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