Use the Information for the Question(s)below

question 69

Multiple Choice

Use the information for the question(s) below.
Luther Industries has no debt and expects to generate free cash flows of $48 million each year.Luther believes that if it permanently increases its level of debt to $100 million,the risk of financial distress may cause it to lose some customers and receive less favorable terms from its suppliers.As a result,Luther's expected free cash flows with debt will be only $44 million per year.Suppose Luther's tax rate is 21%,the risk-free rate is 6%,the expected return of the market is 14%,and the beta of Luther's free cash flows is 1.25 (with or without leverage) .
-The value of Luther without leverage is closest to:

• A)$315 million.
• B)$300 million.
• C)$205 million.
• D)$340 million.

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Definitions:

Job-Related Criteria

The standards or qualifications required for performing a specific job, including skills, experience, and education.

Halo Effect

A cognitive bias where an individual's overall impression influences their judgment about specific traits or abilities.

Personal Opinion

An individual’s view or judgment formed about something, not necessarily based on fact or knowledge.

Contrast Error

A bias in performance appraisal that occurs when evaluations are influenced by comparing employees against each other instead of against objective standards.