Suppose Luther Industries Is Considering Divesting One of Its Product

question 71

Essay

Suppose Luther Industries is considering divesting one of its product lines.The product line is expected to generate free cash flows of $2 million per year,growing at a rate of 3% per year.Luther has an equity cost of capital of 10%,a debt cost of capital of 7%,a corporate tax rate of 21%,and a debt-equity ratio of 2.If this product line is of average risk and Luther plans to maintain a constant debt-equity ratio,what after-tax amount must it receive for the product line in order for the divestiture to be profitable?

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Definitions:

Meals

Portions of food consumed at any specific time during the day, such as breakfast, lunch, or dinner.

Organizing

The management function of arranging people, tasks, and resources to accomplish work and achieve objectives.

Control

The act of regulating or directing operations or activities to achieve desired outcomes, often through feedback and adjustments.

Leading

Leading is the act of directing, influencing, and motivating individuals or teams towards the achievement of goals and objectives.