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:

Informal Channels

Unofficial routes of communication and information exchange within an organization or social group.

Employees Feel Threatened

A situation in which workers perceive their job security, physical safety, or well-being at risk, potentially due to external factors, management decisions, or workplace dynamics.

Unions

Entities that advocate for the collective bargaining rights and working conditions of employees.

Overall Strategies

Comprehensive plans and approaches developed to achieve long-term objectives and goals.