Use the Information for the Question(s)below

question 21

Multiple Choice

Use the information for the question(s) below.
Luther Industries has no debt and expects to generate free cash flows of $48 million each year.Luther believes that if it permanently increases its level of debt to $100 million,the risk of financial distress may cause it to lose some customers and receive less favorable terms from its suppliers.As a result,Luther's expected free cash flows with debt will be only $44 million per year.Suppose Luther's tax rate is 21%,the risk-free rate is 6%,the expected return of the market is 14%,and the beta of Luther's free cash flows is 1.25 (with or without leverage) .
-The value of Luther with leverage is closest to:

• A)$296 million.
• B)$340 million.
• C)$205 million.
• D)$300 million.

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Definitions:

Shares Outstanding

Refers to the total number of shares issued by a corporation that are currently owned by investors, including restricted shares owned by company insiders.

Market Price

Market price is the current price at which an asset or service can be bought or sold in a marketplace.

Merged Firm

A company that exists after two or more companies have combined into one through a merger or acquisition.

Acquisition

The process where one company purchases most or all of another company's shares to gain control over it.