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 12 percent and the cost of debt is 5 percent.The only difference between Lanudiere Resort Company and James Bay Water Park is that Lanudiere Resort has a debt/equity ratio of 0.What is the cost of equity for Lanudiere Resort?
A) 5.0%
B) 8.5%
C) 12.0%
D) 17.0%

Question

Quizplus · Accepted Answer

WACC of levered firm (WACC constant in this world)=(1/2)*.12+(1/2)*.05=8.5%

James Bay Water Park Company Operates in a World with Zero