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EpiscoWhat EpiscoWhat
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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?
Textbook 
Corporate Finance: The Core

Corporate Finance: The Core


Edition: 4th
Authors:
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pbrown223pbrown223
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More solutions for this book are available here
rwacc =  (.10) +  (.07)(1 - .35) = .063667
  =   = $59.406 million
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