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) rs re rd WACC.
B) re rs WACC rd.
C) WACC re rs rd.
D) rd re rs WACC.
E) WACC rd rs re.

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) rs > re > rd > WACC.
B) re > rs > WACC > rd.
C) WACC > re > rs > rd.
D) rd > re > rs > WACC.
E) WACC > rd > rs > re.

Quizplus · Accepted Answer

The cost of equity (re) is typically higher than the cost of retained earnings (rs) because it includes a risk premium for new equity. The WACC is a weighted average of the costs of equity and debt, and the cost of debt (rd) is usually the lowest because it is tax-deductible.

For a Typical Firm, Which of the Following Sequences Is