Assume That to Fund the Investment Taggart Will Take on $150

question 59

Multiple Choice

Assume that to fund the investment Taggart will take on $150 million in permanent debt with the remainder of the investment funded by a cut in dividends.Assuming Taggart will incur a 2% (after-tax) underwriting fee on the new debt issue,the NPV of Taggart's new rail line is closest to:

• A)$195 million
• B)$200 million
• C)$235 million
• D)$240 million

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Definitions:

Risk-Free Rate

A risk-free investment's projected yield, often shown through the returns on government debt.

Call Option

This is a deal in financial settings enabling the purchaser the freedom, but not the requirement, to buy various assets such as stocks, bonds, or commodities at an established price before the conclusion of a certain timeframe.

Put Option

A financial contract allowing the holder to sell an asset at a predetermined price within a specific timeframe.

Strike Price

The price at which the holder of an option contract can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset or security.