Use the Information for the Question(s)below

question 42

Multiple Choice

Use the information for the question(s) below.
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.This product line is of average risk and Luther plans to maintain a constant debt-equity ratio.
-The unlevered value of Luther's product line is closest to:

• A)$25 million.
• B)$60 million.
• C)$45 million.
• D)$40 million.

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Definitions:

Private Sector

The part of the economy that is run by individuals and companies for profit rather than by the state.

Civil Society

The sphere of social life that is open to public participation and forms independently of the state, including organizations, movements, and clubs.

Services

Intangible products provided to consumers or businesses, involving human or mechanical effort.

Multinational

A company that operates in several countries, managing production or delivering services in more than one country.