Use the Information for the Question(s)below

question 89

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 corporate tax rate of 21%,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%.

---

Definitions:

Administrative Expenses

Costs associated with the general management and administration of an organization, rather than production or sales.

Selling Expenses

Costs associated with the selling of a company's products or services, including advertising, sales commissions, and store maintenance.

Finished Goods Inventory

The total value of all completed products that are ready for sale but have not been sold yet.

Indirect Labor

Labor costs not directly associated with the manufacturing of a product, such as maintenance and administrative staff expenses.