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.

Question

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The typical sequence of rates for a firm, from highest to lowest, is: cost of equity (re) > cost of retained earnings (rs) > weighted average cost of capital (WACC) > cost of debt (rd). This is because equity is riskier than debt, so investors require a higher return for equity. Retained earnings are cheaper than new equity due to flotation costs, but still more expensive than debt. The WACC is an average of the cost of debt and equity, weighted by their proportions in the firm's capital structure, and is typically less than the cost of equity or retained earnings but more than the cost of debt.

For a Typical Firm, Which of the Following Sequences Is