Question

Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt–equity ratio of 1.19. The cost of equity is 12.4 percent and the pretax cost of debt is 7 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 39 percent?

Answer 1

Weight of equity = 0.4566

Step-by-step explanation:

Bermuda Cruises

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

Weight of equity = 1 / (1 + 1.19)

Weight of equity = 1 / 2.19

Weight of equity = 0.4566

Therefore the capital structure weight of the firm's equity if the firm's tax rate is 39 percent is 0.4566