Use the following information to answer the question(s)below.
Taggart Transcontinental is considering a $250 million investment to launch a new rail line.The project is expected to generate a free cash flow of $32 million per year,and its unlevered cost of capital is 8%.Taggart's corporate tax rate is 21%.Taggert has 4 million shares of stock outstanding.
-Assume that to fund the investment Taggart will take on $150 million in permanent debt with the remainder of the investment funded through issuance of new equity.Assuming Taggart will incur a 2% (after-tax)underwriting fee on the new debt issue and a 5% underwriting fee on the issuance of new equity,the NPV of Taggart's new rail line is closest to:
A)$175 million.
B)$200 million.
C)$235 million.
D)$240 million.

Question

Quizplus · Accepted Answer

The correct answer is A. The NPV of the project is $175 million. The project has a free cash flow of $32 million per year, and its unlevered cost of capital is 8%. Taggart's corporate tax rate is 21%. Taggart has 4 million shares of stock outstanding. To fund the investment, Taggart will take on $150 million in permanent debt with the remainder of the investment funded through issuance of new equity. Assuming Taggart will incur a 2% (after-tax) underwriting fee on the new debt issue and a 5% underwriting fee on the issuance of new equity, the NPV of Taggart's new rail line is closest to $175 million.

Use the Following Information to Answer the Question(s)below