Use the Information for the Question(s)below

question 28

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 marginal tax rate of 35%,and a debt-equity ratio of 2.This product line is of average risk and Luther plans to maintain a constant debt-equity ratio.
-Luther's Unlevered cost of capital is closest to:

• A)8.0%
• B)8.5%
• C)9.0%
• D)6.4%

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Definitions:

Base-Year Quantities

Quantities of goods and services in a specific base year used for comparison or calculation purposes in economic analysis.

Laspeyres Index

A measure of the change in the cost of purchasing a specified set of goods and services over time, using the quantities bought in a base period as weights.

Bankruptcy Law

Legal statutes and regulations that govern the process by which individuals or enterprises can declare their inability to pay their debts and seek relief.

Debtor

A debtor is an individual or entity that owes money to another party, often a creditor, as a result of borrowing funds or failing to pay for goods or services.