question archive Canterra Construction Supplies Inc
Canterra Construction Supplies Inc
Subject:FinancePrice: Bought3
Canterra Construction Supplies Inc. is considering what to do with its logistics arm which has been a financial disappointment, in spite of the large investment (with $500 million in book value of assets today) the company has made in it. The logistics division is in stable growth, with cash flows growing 2% a year forever. Canterra can sell the business to Donnelly Trucking, a potential buyer, for $ 200 million and claim the loss on its assets as tax deduction (entitling it to a 25% tax savings). Canterra's cost of capital as a company is 8% but the cost of capital of logistics companies is 10%. How high would the expected cash flows from the logistics division have to be next year for Canterra not to divest?
