Fuji Inc.is registered as a business in the film-making industry and has a required return on its assets of 12%.It can borrow in the debt market at 6%.If there are no taxes and M&M's proposition II holds,what is the cost of equity if there is 100% equity financing?
A)12%
B)13%
C)14%
D)15%

Question

Quizplus · Accepted Answer

According to M&M's proposition II, the cost of equity is not affected by the financing structure of the company. Therefore, the cost of equity for Fuji Inc. would be the required return on its assets, which is given as 12%. As there is 100% equity financing, the cost of equity would remain the same.

Fuji Incis Registered as a Business in the Film-Making Industry and and Has