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 $10 million. The product will generate free cash flow of $0.80 million the first year, and this free cash flow is expected to grow at a rate of 5% per year. Gupta has an equity cost of capital of 11.2%, a debt cost of capital of 5.06%, and a tax rate of 40%. Gupta maintains a debt equity ratio of 0.80 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 smilion (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 s 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 smilion (Round to two decimal places)

Answer 1

a. The NPV of new product line is $ 21.13 million.

b. Debt will be $ 13.83 million.

c. The amount of the product line's value that is attribute to the present value of interest tax shields is $ 8.08 million.

Calculation is given in the below attached images.

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is new NPV of the a chat product the line ? o CUACC C1l 1.8211.2010) (08/1:8) (5.06%) C 1 - 40%) C. 22 % + 1.35% 7.57 % o value 0.8000 million 7,57% - 5% 0.8000 1257% 31.13 million z million onpr z 3 L. 13 million - 10 21.13 million b) how much debt will Gupta initially take on as result of launching this product line ? lo Debt - to value 0,8 1.8 retio 44.44% bebt 44.44 % X 31, 13 million 2 13.83 to million Page

PAGE NO.: DATE : c) how is much of the product line's value attributcible to the present ralue interest tex shield ? gives Discounting ri enlevered value ru (1/1.8) (11.20%) + Co.8 11.8) (5.06% 220lo +2.25 / 8.47 olo o Vu 0.8000 million 8. ufolo -50% 2 0.800 13.47% million 23.05 Tos shield shield value 31.13 million 8.08 million 23.05 million Page 2