Alice Stewart,who is the CFO of Meyers Foods,is teaching an upper-level course in corporate finance at the University of Phoenix.One of the assignments Alice gave her class was to compute the component costs of capital for Meyers Foods.Meyers Foods uses debt and common stock (no preferred stock)to finance its investments.Students in the class did not reach the same conclusions about the relationships among the components costs-that is,the after-tax cost of debt,rdT,the cost of retained earnings (i.e.,internal equity),rs,and the cost of new,or external,equity,re.Which of the following relationships should be correct for Meyers Foods?

Question

Quizplus · Accepted Answer

The correct relationship is that the after-tax cost of debt (rdT) is typically lower than the cost of retained earnings (rs), which in turn is lower than the cost of new equity (re). This is because debt is generally less risky than equity, and retained earnings do not incur flotation costs unlike new equity.

Alice Stewart,who Is the CFO of Meyers Foods,is Teaching an Upper-Level