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Alex777 [14]
3 years ago
11

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 p

ercent 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?
Business
1 answer:
raketka [301]3 years ago
7 0

Answer:

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

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 %

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