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:

Corporate Valuation

The process of determining the overall value of a business entity considering its assets, earnings, market position, and potential for future earnings.

Accounting Numbers

Quantitative financial data reported in the financial statements of a company, representing its economic activities.

Unsecured

Pertaining to loans or debts that are not backed by collateral, making them riskier for lenders.

Debenture

A type of debt instrument that is not secured by physical assets or collateral but is based on the issuer's creditworthiness and reputation.