For a typical firm, which of the following sequences is CORRECT? All rates are a
ID: 2752898 • Letter: F
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. rd > re > rs > WACC. c. WACC > rd > rs > re. d. WACC > re > rs > rd. e. re > rs > WACC > rd.Explanation / Answer
The answer is D i.e., RE>RS>WACC>RD Where RE = Return on Equity RS = Return on stock WACC = Weighted Average of Cost of Capital RD= Return on Debt ** Return debt has lower than all due to tax saving impact on interest on debt ** WACC is slight higher than RD due to it combine total RD RE and RS also **Return stock is higher than the RD and WACC as it should meet the investors promise. ** RE is highest requirement as these are the company's funds itself
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