Choose the Most Correct answer for relative costs of components of a firm\'s cap

Question

Choose the Most Correct answer for relative costs of components of a firm's capital structure. Where: RS = Rate investors demand on a firm's STOCK RD = Rate investors demand on a firm's DEBT (i.e., the Yield to Maturity of the firm's debt). WACC = The firm's Weighted Average Cost of Capital t = the firm's tax rate. "<" means "Less Than" ">" means "Greater Than or equal to"

a. WACC > RS > RD

b. RS < RD(1-t) < RD

c. RS > RD > WACC

d. None of these relationships is correct.

e. RS > RD > RD(1-t)

Explanation / Answer

e. RS > RD > RD(1-t)

Rate demanded by equity investors is more than RD as equity investors take more risk. RD is obviously more than RD(1-t)

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