1. What should be the weight of debt and equity? For Stealth.

Long-term debt and equity in millions of dollars. D/E: Debt-equity ratio. Pamela knew the steps she had to follow to estimate Stealth's cost of capital. She also knew that the process combined art and science, the artistic part being mostly related to the selection of companies comparable to Stealth. There was little question that Stealth fit neatly into the 'Apparel, Footwear and Accessories' industry, so she made a list of some of the relevant companies in the sector. (See the Exhibit.) Lori's expectations for Stealth were high, so Pamela thought she would assess the company's business risk based on the two companies Lori admired the most, Nike and Under Armour. She estimated the beta of these two companies and obtained 0.83 for Nike and 0.53 for Under Armour; the D/E ratios underlying these levered betas were (as the Exhibit shows) 0.38 for Nike and 0.27 for Under Armour. The risk-free rate in early January 2020 was 1.9%, and the market risk premium remained around its historical average of 5\%. Pamela thought that Stealth would face the 21% corporate tax rate introduced in the 2017 Tax Cuts and Jobs Act, substantially lower than the 35\% rate that companies had faced for the previous several years. The cost of capital Pamela needed to estimate was obviously dependent on Stealth's capital structure. However, Lori had never tackled that important issue; she had been reinvesting most of Stealth's profits without ever thinking whether that was the best way of financing the company. Pamela, on the other hand, knew that having an optimal capital structure was the only way to minimize Stealth's cost of capital. After giving the issue some thought, she decided that the average debt ratio in the industry (33%), or D/E ratio (0.51), was a plausible target for Stealth to aim for. Whether Stealth's debt should be a tradable bond or some private placement, she would decide later. In any case, Pamela thought that the 33\% target debt ratio would make Stealth's debt consistent with an A