Pain-Free Inc.is a business dealing in pain reduction medication.It has a required return on its assets of 18%.It can borrow in the debt market at 10%.If there are no taxes and M&M's proposition II holds,what is the cost of equity if there is 50% equity financing and 50% debt financing?

Question

Quizplus · Accepted Answer

According to M&M Proposition II without taxes, the cost of equity is calculated as: Cost of Equity = Cost of Assets + (Cost of Assets - Cost of Debt) * (Debt/Equity). Substituting the given values: 18% + (18% - 10%) * (1) = 26%.