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.What is the cost of equity for Lanudiere Resort?
A) 11.5%
B) 13.25%
C) 15.0%
D) 18.5%

Question

Quizplus · Accepted Answer

11.5% = Ke * 1/3 + 8%*2/3,Ke = 18.5%

James Bay Water Park Company Operates in a World with Zero