Use the Information for the Question(s)below

question 28

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 marginal tax rate of 35%,and a debt-equity ratio of 2.This product line is of average risk and Luther plans to maintain a constant debt-equity ratio.
-Luther's Unlevered cost of capital is closest to:

• A)8.0%
• B)8.5%
• C)9.0%
• D)6.4%

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Definitions:

Cost Volume Profit Model

A managerial accounting technique used to analyze how costs and sales volume affect profit.

Tax Factor

A numerical figure used to calculate the impact of taxes on an investment or financing decision, often representing the marginal tax rate.

Breakeven Point

The level of production or sales at which total revenues equal total expenses, with no profit or loss.

Sales Proportion

The ratio of a particular product's sales to the total sales of all products, often used to analyze the performance or popularity of products.