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

question 17

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) $23 million

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Definitions:

Psychoanalytic Theorist

An individual specializing in psychoanalytic theory, which focuses on the unconscious mind and childhood experiences in shaping personality and behavior.

Sigmund Freud

The founding father of psychoanalysis, a method for treating psychopathology through dialogue between a patient and a psychoanalyst.

Catharsis

The process of releasing, and thereby providing relief from, strong or repressed emotions, often through art, drama, or other forms of expression.

Emotional Release

The process of letting go of pent-up emotions, which can contribute to a sense of relief or catharsis.