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?

---

Definitions:

Primary Group

A small, close-knit group of individuals who interact over a long period of time on direct and personal levels, such as a family or close friends.

Social Identity

The part of an individual's self-concept derived from perceived membership in a social group, including its norms and relationships.

Audiences and Crowds

A conceptual distinction where audiences are groups of people observing an event, while crowds are groups that gather for a shared purpose and may engage in active participation.

Coworkers

Individuals who work together in the same organization or workplace.