Question

You are a consultant who was hired to evaluate a new product line for Gupta Enterprises. The upfront investment required to launch the product is

$ 12$12

million. The product will generate free cash flow of

$ 0.71$0.71

million the first​ year, and this free cash flow is expected to grow at a rate of

4 %4%

per year. Gupta has an equity cost of capital of

10.6 %10.6%​,

a debt cost of capital of

6.73 %6.73%​,

and a tax rate of

38 %38%.

Gupta maintains a​ debt-equity ratio of

0.900.90.

a. What is the NPV of the new product line​ (including any tax shields from​ leverage)?

b. How much debt will Gupta 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)?

The NPV of the new product line is

​$nothing

million.  ​(Round to two decimal​ places.)

b. How much debt will Gupta initially take on as a result of launching this product​ line?

Debt will be

​$nothing

million.  ​(Round to two decimal​ places.)

c. How much of the product​ line's value is attributable to the present value of interest tax​ shields?

The amount of the product​ line's value that is attributable to the present value of interest tax shields is

​$nothing

million.  ​(Round to two decimal​ places.)

Answer 1