For a typical firm with a given capital structure, which of the following is correct? (Note: All rates are after taxes.)
A) rd rs WACC.
B) rs rd WACC.
C) WACC rs rd.
D) rs WACC rd.
E) None of the statements above is correct.

Question

For a typical firm with a given capital structure, which of the following is correct? (Note: All rates are after taxes.)
A) rd > rs > WACC.
B) rs > rd > WACC.
C) WACC > rs > rd.
D) rs > WACC > rd.
E) None of the statements above is correct.

Quizplus · Accepted Answer

The cost of equity (rs) is typically higher than the WACC, which is a weighted average of the cost of equity and the cost of debt (rd). The cost of debt is usually the lowest because it is tax-deductible.

For a Typical Firm with a Given Capital Structure, Which