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

question 38

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 marginal corporate tax rate is 35%.
-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% 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) $185 million
• B) $195 million
• C) $200 million
• D) $235 million

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Definitions:

Critical Thinking Skill

The ability to analyze information objectively and make a reasoned judgment.

Scientific Knowledge

Information and understanding gained through the scientific method, including observation, hypothesis testing, and empirical evidence.

Analysis

The process of examining components or structures in detail to understand their nature, function, or meaning.

White Blood Cell Count

A laboratory test measuring the number of white blood cells in a sample of blood, important for diagnosing and monitoring infections and other diseases.