Luther Industries Is Considering Borrowing $500 Million to Fund a New

question 66

Multiple Choice

Luther Industries is considering borrowing $500 million to fund a new product line.Given investors' uncertainty regarding its prospects,Luther will pay a 7% interest rate on this loan.The firm's management knows,that the actual risk of the loan is extremely low and that the appropriate rate on the loan is 5%.Suppose the loan is for four years,with all principal being repaid in the fourth year.If Luther's marginal corporate tax rate is 35%,then the net effect of the loan on the value of the new product line is closest to:

• A)$22 million
• B)$34 million
• C)$35 million
• D)$24 million

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Definitions:

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