Question

Bermuda Cruises issues only common stock and coupon bonds. The firm has a debt-equity ratio of .45. The cost of equity is 17.6 percent and the pretax cost of debt is 8.9 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 35 percent?

Answer 1

Answer:

We = 68.97%

Explanation:

$debt to equity ratio = 0.45\\\frac{Debt}{Equity} = 0.45\\ Debt = 0.45 Equity\\\\Total capital = Equity + Debt = Equity + 0.45 Equity\\ Total Capital = Equity (1+0.45)= 1.45 Equity$

Let weight of equity in the capital structure be represented by We.

$We = \frac{Equity}{1.45Equity} = \frac{1}{1.45} = 0.6897$

Therefore the capital structure weight of the firm's equity is 68.97%.