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

question 21

Multiple Choice

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.Assume 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.If management believes Taggart's current share price of $25 is $3 less than its true value,then the NPV of Taggart's new rail line is closest to:

• A)$160 million.
• B)$195 million.
• C)$200 million.
• D)$235 million.

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Definitions:

Price Elasticity

An evaluation of how shifts in a good's price affect the quantity of it demanded.

Slope

In mathematics, the rate at which a line or curve inclines or declines, calculated as the ratio of the vertical change to the horizontal change between two points on the line.

Demand Curve

A graph showing the relationship between the price of a product and the quantity of the product that consumers are willing and able to purchase at various prices.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a specific price level within a certain period.