Suppose Luther Industries Is Considering Divesting One of Its Product

question 93

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 marginal tax rate of 35%,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:

Poor Developmental Outcomes

Refers to suboptimal progress in physical, cognitive, emotional, or social development in children and adolescents.

Resilient Children

Children who demonstrate the ability to withstand or recover quickly from difficult conditions, such as trauma or adversity.

Negative Outcomes

Unfavorable or adverse results that occur as a consequence of an action or a series of actions.

Economic Welfare

The overall state of economic health and prosperity in a society, often measured by standards of living, income distribution, and availability of goods and services.