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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 $14 million. The product will generate free cash flow of $0.71 million the first year, and this free cash flow is expected to grow at a rate of 3% per year. Markum has an equity cost of capital of 11.3%, a debt cost of capital of 8.36%, and a tax rate of 32%. Markum maintains a debt-equity ratio of 0.60.

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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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92386075

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