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Minchanka
2 months ago
7

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=return on equity, cost of equity; rd=return on debt, cost of debt; WACC=weighted avg. cost of capital)
A) rs > rd > WACC.

B) rs > WACC > rd.

C) WACC > rs > rd.

D) rd > rs > WACC.
Business
1 answer:
Katen [3.5K]2 months ago
6 0
The right sequence is B) rs > WACC > rd. The equation to calculate WACC is as follows: = Weightage of debt × cost of debt × (1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of common stock) × (cost of common stock). It is known that equity carries more risk compared to debt, and returns on equity are viewed as interest, while for debt it is regarded as dividends. Additionally, the WACC is situated between debt and equity.
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