Question

Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt–equity ratio of .75. The cost of equity is 11.6 percent and the pretax cost of debt is 6.7 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 40 percent?

Answer 1

the capital structure weight of the firm's equity will be 57.14 %.

Step-by-step explanation:

Weighted Average Cost of Capital is the return that is required by the providers of long term sources of finance.

A debt–equity ratio of 0.75 means:

Debt : Equity = 0.75 : 1

The Total Ratio will be = 0.75 + 1.00

= 1.75

Therefore, the capital structure weight of the firm's equity will be :

Equity Weight = Equity Ratio ÷ Total Ratio

= 1.00 ÷ 1.75

= 0.5714 or 57.14 %