Sunshine Cruises issues only common stock and coupon bonds. The firm has a debt-equity ratio of 0.55. The cost of equity is 16.3 percent and the pre-tax cost of debt is 9.9 percent. What is the capital structure weight of the firm's equity if the firm's tax rate is 34 percent?

Question

Quizplus · Accepted Answer

The debt-equity ratio is 0.55, meaning for every $1 of equity, there is $0.55 of debt. The equity weight is calculated as 1 / (1 + 0.55) = 0.6452 or 64.52 percent.

Sunshine Cruises Issues Only Common Stock and Coupon Bonds