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:

Accounting Break-even

The moment when the sum of all costs equals the total revenue, which means there is no net gain or loss.

Operating Cash Flow

Cash generated by a company’s normal business operations.

Fixed Costs

Fixed outgoings that are unaffected by production or sales volumes, such as renting costs, salary payments, and insurance expenses.

Depreciation

The systematic allocation of the cost of a tangible asset over its useful life, reflecting its consumption, wear and tear, or obsolescence.