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Memphic Memphic
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6 years ago
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
Textbook 
Corporate Finance: The Core

Corporate Finance: The Core


Edition: 4th
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#1
6 years ago
A
Explanation:  A) NPV = VL - Investment = VU + TcD - Investment - (1 - Tc)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.)
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