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:

Ten-Year-Old

A term used to describe someone or something that is exactly ten years of age.

Biogenic Needs

basic, essential human requirements for survival, such as food, water, air, and shelter.

Psychogenic Needs

Fundamental psychological or emotional needs influencing behaviors and attitudes.

Actualization Needs

The highest level in Maslow's hierarchy of needs, representing the desire for self-fulfillment and realizing one's potential.