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

question 57

Multiple Choice

Use the following information to answer the question(s) below.
Taggart Transcontinental is considering adding a trucking division to expand the coverage of its existing rail lines.The trucking division will cost $1,000,000 and is expected to generate free cash flows of $100,000 for each of the next five years.Taggart Transcontinental forecasts that future free cash flows after year 5 will grow at 2% per year,forever.Taggart Transcontinental's cost of capital is 10%.
-The NPV for the trucking division is closest to:

• A)$170,750.
• B)$200,000.
• C)$212,550.
• D)$250,000.
• E)$312,500.

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Definitions:

Shareholders' Equity

The residual interest in the assets of a corporation after deducting its liabilities; also known as stockholders' equity.

Sustainable Growth Rate

The maximum rate at which a company can grow its revenues and earnings without increasing its financial leverage or equity financing.

Return On Equity

A measure of financial performance calculated by dividing net income by shareholders' equity, indicating how effectively management is using a company’s assets to create profits.

Payout Ratio

A financial metric that shows the proportion of earnings a company pays to its shareholders in the form of dividends.