James Bay Water Park Operates in a World with Zero

question 45

Multiple Choice

James Bay Water Park 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% and the cost of debt is 8%.The only difference between Whispering Pines Resort and James Bay Water Park is that Whispering Pines Resort has a debt/equity ratio of 2.According to M&M, the cost of equity for Whispering Pines Resort will be:

• A)greater than the cost of equity for James Bay Water Park.
• B)the same as the cost of equity for James Bay Water Park.
• C)less than the cost of equity for James Bay Water Park.
• D)insufficient information is provided to answer the question.

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Definitions:

Net Income

The total profit of a company after all expenses, taxes, and costs have been subtracted from total revenue, indicating the company's profitability.

Prepaid Insurance

An asset account that represents the amount of insurance premiums paid in advance for coverage that extends beyond the current accounting period.

Consulting Revenue

Income earned by a business or individual for providing expert advice or consultancy services in their field of expertise.

Rent Expense

An expenditure recorded by a company for the use of rental property or equipment.