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)$185 million
B)$195 million
C)$200 million
D)$235 million

Question

Quizplus · Accepted Answer

A)NPV = V^L - Investment = V^U + T_cD - Investment - (1 - T_c)issuance cost = ($32 million)/(.08)+ (35%)$150 million - $250 million - 2%(150)- 5%(100)- 4 × 3 = 182.5 (Last term is loss from 400 shares at $25 instead of $28). (Note that equity issuance costs are not tax deductible. )

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