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 $7 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 6% per year. Markum has an equity cost of capital of 10.9%​, a debt cost of capital of 5.35%​, and a tax rate of 42%.  Markum maintains a​ debt-equity ratio of 0.40. What is the NPV of the new product line​ (including any tax shields from​ leverage)? ​(Round to two decimal​places.) How much debt will Markum initially take on as a result of launching this product​ line? ​(Round to two decimal​places.) How much of the product​ line's value is attributable to the present value of interest tax​ shields? ​(Round to two decimal​places.)

Cornerstones of Cost Management (Cornerstones Series)
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ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
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Chapter19: Capital Investment
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Problem 13E: Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a...
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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 $7 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 6% per year. Markum has an equity cost of capital of 10.9%​, a debt cost of capital of 5.35%​, and a tax rate of 42%.  Markum maintains a​ debt-equity ratio of 0.40.

  1. What is the NPV of the new product line​ (including any tax shields from​ leverage)? ​(Round to two decimal​places.)
  2. How much debt will Markum initially take on as a result of launching this product​ line? ​(Round to two decimal​places.)
  3. How much of the product​ line's value is attributable to the present value of interest tax​ shields? ​(Round to two decimal​places.)
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