# Question: You are a consultant who was hired to evaluate a

You are a consultant who was hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $10 million. The product will generate free cash flow of $750,000 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 11.3%, a debt cost of capital of 5%, and a tax rate of 35%. Markum maintains a debt-equity ratio of 0.40.

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?

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?

## Answer to relevant Questions

Consider Alcatel-Lucent’s project in Problem 5.a. What is Alcatel-Lucent’s unlevered cost of capital?b. What is the unlevered value of the project?c. What are the interest tax shields from the project? What is their ...Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.50. For each year into the indefinite future, Remex’s free cash flow is expected to equal $25 million. Remex is considering changing ...Consider Avco’s RFX project from Section 18.3. Suppose that Avco is receiving government loan guarantees that allow it to borrow at the 6% rate. Without these guarantees, Avco would pay 6.5% on its debt.a. What is Avco’s ...Under the assumption that Ideko market share will increase by 0.5% per year, you determine that the plant will require an expansion in 2010. The cost of this expansion will be $15 million. Assuming the financing of the ...How does the assumption on future improvements in working capital affect your answer to Problem 13?In Problem 13, Using the information produced in the income statement in Problem 4, use EBITDA as a multiple to estimate the ...Post your question