James Bay Water Park Company Operates in a World with Zero

question 68

Multiple Choice

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 3.What is the cost of equity for Lanudiere Resort?

• A) 11.5%
• B) 12.67%
• C) 15.0%
• D) 22.0%

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Definitions:

Reinvestment Assumption

The presumption that cash flows received from an investment will be reinvested at a consistent rate over the life of the investment.

Net Present Value

A financial measure that calculates the present value of net cash flows (inflows minus outflows) from an investment, discounting future cash flows to the present.

Internal Rate of Return

A metric used in financial analysis to estimate the profitability of potential investments, calculated as the rate that makes the net present value of cash flows equal to zero.

Capital Expenditure Decision Process

The process of making decisions related to the acquisition of capital assets, taking into consideration their costs, benefits, and risks.