Use the Information for the Question(s)below

question 42

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.
-The unlevered value of Luther's product line is closest to:

• A)$25 million.
• B)$60 million.
• C)$45 million.
• D)$40 million.

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Definitions:

Government Revenue

The money received by government from taxes and non-tax sources to finance government expenditures.

Market Size

The total volume or value of all sales within a given market over a specific period of time.

Consumer Surplus

The gap between the total price consumers are willing to pay for a good or service and the price they actually pay.

Producer Surplus

The difference between the amount producers are willing and able to supply a good for and the actual amount they receive (market price).