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19 August, 08:36

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?

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  1. 19 August, 08:58
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    Weight of equity = 0.4566

    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
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