James Bay Water Park Company and Lanudiere Resort Company Operate

question 64

Multiple Choice

James Bay Water Park Company and Lanudiere Resort Company operate in a world with taxes and no financial distress.James Bay Water Park has a debt/equity ratio of 1.The cost of equity to James Bay Water Park is 15% 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.According to M&M,the cost of equity for Lanudiere Resort should 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:

Acid-test Ratio

A financial metric that measures a company's ability to pay off its short-term liabilities with its quick assets, excluding inventory.