Component Cost of Capital
Each source of capital has a different cost because of the differences among the sources, such as seniority, contractual commitments, and potential value as a tax shield. For business, there are mainly three sources of capital: debt, preferred equity, and common equity. Understanding the cost of each part is crucial in knowing the cost of capital of business. Cost of Debt The cost of debt is the cost of debt financing to a company when it issues a bond or takes out a bank loan. There are two