Final answer:
The capital structure weight of the firm's equity for Bermuda Cruises, given a debt-equity ratio of 1.41 and other specified costs, is found to be 41.49%, which corresponds to option C. 4149.
Step-by-step explanation:
The question involves calculating the capital structure weight of a firm's equity, given its debt-equity ratio and costs of debt and equity. Bermuda Cruises has a debt-equity ratio of 1.41, a cost of equity of 13.5 percent, and a pretax cost of debt of 7.6 percent. The firm's tax rate is 25 percent. To find the proportion of equity in the firm's capital structure, we use the formula:
Total value = Debt + Equity
Given the debt-equity ratio (D/E), where 'D' is debt and 'E' is equity:
D/E = 1.41 implies that D = 1.41E
We can write the total value as E + 1.41E or 2.41E. The weight of the firm's equity is then E / (E + 1.41E) which simplifies to E / 2.41E or 1 / 2.41.
Calculating this gives:
Equity weight = 1 / 2.41 = 0.4149 or 41.49%
The correct answer is therefore option C. 4149 or 41.49% when expressed as a percentage.