Reference no: EM133071790
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 $150 million (time 0). The product will generate free cash flow of $8 million the first year, and this free cash flow is expected to grow at a rate of 3.5% per year. Markum has an equity cost of capital of 12%, a debt cost of capital of 5%, and a marginal tax rate of 40%. Markum plans to finance the project with a constant D:V ratio of 0.5. Answers must be rounded up to one decimal place wherever required.
1. Calculate Markum's WACC.
2. Calculate the NPV of the new product line using the WACC method.
3. How much debt will Markum initially take on as a result of launching this product line?
4. How will Markum's total debt change during the project's life?
5. Calculate the ra of the new product line.
6. Calculate the unlevered value of the project.
7. What is the total enterprise value of the project?
8. Estimate the NPV of the project using the APV method.
9. How much of the project's value is attributable to the present value of the interest tax shields?
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