Question

Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt–equity ratio of .73. The cost of equity is 11.5 percent and the pretax cost of debt is 6.6 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 39 percent?

Answer 1

0.5780

Step-by-step explanation:

Calculation to determine the capital structure weight of the firm's equity

Using this formula

Weight of equity = 1 / (1 + D-E)

Let plug in the formula

Weight of equity = 1 / (1 + .73)

Weight of equity = 1 / 1.73

Weight of equity = 0.5780

Therefore the capital structure weight of the firm's equity is 0.5780