James Bay Water Park Company operates in a world with zero taxes and no financial distress.The firm has a debt/equity ratio of 1.The cost of equity is 15 percent and the cost of debt is 8 percent.The only difference between Lanudiere Resort Company and James Bay Water Park is that Lanudiere Resort has a debt/equity ratio of 2.According to M&M,the weighted average cost of capital for Lanudiere Resort will be:
A) greater than the weighted average cost of capital for James Bay Water Park.
B) the same as the weighted average cost of capital for James Bay Water Park.
C) less than the weighted average cost of capital for James Bay Water Park.
D) insufficient information is provided to answer the question.

Question

Quizplus · Accepted Answer

According to Modigliani and Miller (M&M) Proposition II without taxes, the weighted average cost of capital (WACC) remains constant regardless of the firm's capital structure. Therefore, the WACC for Lanudiere Resort will be the same as that for James Bay Water Park.

James Bay Water Park Company Operates in a World with Zero