Question

Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt–equity ratio of .71. The cost of equity is 11.4 percent and the pretax cost of debt is 6.5 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 35 percent? Multiple Choice .5570 .6566 .6301 .5848 .4152

Answer 1

The capital structure weight of the firm's equity if the firm's tax rate is 35 percent is 58.48%.

Step-by-step explanation:

In order to calculate the capital structure weight of the firm's equity if the firm's tax rate is 35 percent we would have to calculate the following:

According to the given data the firm has a debt–equity ratio of 0.71, therefore:

capital structure weight of the firm's equity=1/(1+0.71)

capital structure weight of the firm's equity=58.48%

The capital structure weight of the firm's equity if the firm's tax rate is 35 percent is 58.48%