Longmont Inc. is in the property management business and has a required return on its assets of 10%. It can borrow in the debt market at 5%
If there are no taxes and M&M's proposition II holds, what is the cost of equity if there is 10% equity financing and 90% debt financing?
A) 45%
B) 50%
C) 55%
D) 60%
Answer: C
Explanation: C) Cost of Equity: Re = Ra + (Ra - Rd) × = 10% + (10% - 5%) × = 55%.
Business
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