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?
A) 18%
B) 26%
C) 28%
D) None of these
Answer: B
Explanation: B) Cost of Equity: Re = Ra + (Ra - Rd) × = 18% + (18% - 10%) × = 26%.
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