Question

In: Finance

18.3 You are a consultant who has been hired to evaluate a new product line for...

18.3

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 $12 million. The product will generate free cash flow of $0.70 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 11.4% , a debt cost of capital of 8.63% , and a tax rate of 32%. 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?

Solutions

Expert Solution

WHEN I SOLVED THIS SUM EARLIER, ALL FIGURES WERE IN 2 DECIMALS ONLY. BUT NO INTERMEDIATE ROUNDING WAS DONE. SAME PROCESS IS FOLLOWED HERE. NEED ANY CHANGE, LET ME KNOW. THANK YOU


Related Solutions

You are a consultant who has been hired to evaluate a new product line for Markum...
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 $0.70 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 11.9%​, a debt cost of capital of 6.37%​, and a tax rate of 42%....
You are a consultant who was hired to evaluate a new product line for Gupta Enterprises....
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 $ 5 million. The product will generate free cash flow of $ 0.74 million the first​ year, and this free cash flow is expected to grow at a rate of 4 % per year. Gupta has an equity cost of capital of 10.7 %​, a debt cost of capital of 5.14 %​, and a tax...
You are a consultant who was hired to evaluate a new product line for Gupta Enterprises....
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 $15 million. The product will generate free cash flow of $0.70 million the first​ year, and this free cash flow is expected to grow at a rate of 4% per year. Gupta has an equity cost of capital of 11.6 % a debt cost of capital of 4.74 % and a tax rate of 42%....
You are a consultant who was hired to evaluate a new product line for Gupta Enterprises....
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 $ 8 million. The product will generate free cash flow of $ 0.77 million the first​ year, and this free cash flow is expected to grow at a rate of 4 % per year. Gupta has an equity cost of capital of 10.6 % ​, a debt cost of capital of 7.14 % ​, and...
You are a consultant who was hired to evaluate a new product line for Gupta Enterprises....
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...
You are a business consultant who has just been hired by a young entrepreneur who is...
You are a business consultant who has just been hired by a young entrepreneur who is beginning a new business. The entrepreneur plans to start a privately owned business (i.e. grocery, clothing, hairdresser, auto repair, cleaning service, etc.). Your client is uncertain where to locate the business and is looking for your professional advice. Your client's initial thoughts are to establish sales of $200,000 the first year and grow the business at an average annual rate of 20% each year...
You are a consultant who has been hired to advise the manager of an international HRM...
You are a consultant who has been hired to advise the manager of an international HRM function, (based in London), that is considering setting up a new office in either Beijing, China or South Africa. You find out that the firm has been keen to expand its operations into emerging markets, but has little experience of foreign subsidiaries, and how to staff them. The manager tasked with developing the strategy has no international experience. Advise the company about the issues...
You have been hired as a consultant for Southwest Hospital to evaluate some of their business...
You have been hired as a consultant for Southwest Hospital to evaluate some of their business operations. The hospital board has provided the following information to help you in your evaluation: Southwest Hospital has an operating room used only for eye surgery. The annual cost of rent, heat, and electricity for the operating room and its equipment is $341,000. The annual salaries of the people who staff this room total $559,000. Each surgery performed requires the use of $760 worth...
As a political consultant for an aspiring politician, you have been hired to evaluate the following...
As a political consultant for an aspiring politician, you have been hired to evaluate the following statements that pertain to capital gains and losses. Evaluate the statement and provide at least a one-paragraph explanation of each statement. As you prepare your answer, consider the fact that the aspiring politician does not have much knowledge about taxation. a. The tax on capital gains is considered a voluntary tax. b. High-income taxpayers receive the most benefit from preferential treatment for capital gains.
The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV...
The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable insect control mechanisms. They anticipate that the business will continue into perpetuity. Following the negligible start-up costs, BICC expects the following nominal cash flows at the end of the year: Revenues $ 267,000 Labor costs 187,000 Other costs 57,000 The company will lease machinery for $92,000 per year....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT