For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure. A) r_e r_s WACC r_d. B) WACC r_e r_s r_d. C) r_d r_e r_s WACC. D) WACC r_d r_s r_e. E) r_s r_e r_d WACC.

Question

For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure. A) r_e > r_s > WACC > r_d. B) WACC > r_e > r_s > r_d. C) r_d > r_e > r_s > WACC. D) WACC > r_d > r_s > r_e. E) r_s > r_e > r_d > WACC.

Quizplus · Accepted Answer

The correct sequence reflects the cost of capital for different financing sources. Equity (e) typically has the highest cost due to its riskier nature to investors, followed by preferred stock (s), and then debt (d), which usually has the lowest cost because of tax deductibility of interest. The Weighted Average Cost of Capital (WACC) is a weighted average of these costs and typically falls in the middle, indicating the overall cost of capital for the firm.

For a Typical Firm, Which of the Following Sequences Is