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. (Rs = cost of retained equity; Rd=after-tax cost of debt; and WACC = weighted average cost of capital)

Answer 1

Answer:

The answer is: re > rs > WACC > rd.

Explanation:

We can see that the return on equity is greater than return on common stock which is greater than Weighted average cost of capital and return on debt.

For the source of financing, debt will be less cost than others because of the tax effect.

While weighted average cost is decided by return on equity, preferred stock and debt. => It is higher than the cost for debt.