You are a consultant who was hired to evaluate a new product line for Markum Enterprises. The

Question:

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 of $750,000 the first year, and this is expected to grow at a rate of 4% per year. Markum has an equity of 11.3%, a debt 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?

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