Goal of firms is to minimize its weighted-cost of capital, tax shields for debt makes debt a very attractive component
Cost of Equity
More expensive than the cost of debt since stockholders are subject to more risk than debt holders. Usually estimated by using the dividend growth model.
Cost of Retained Earnings
The opportunity cost that stockholders of a firm could earn elsewhere if they made investments of comparable risk. This figure is imputed.
Cost of Preferred Stock
Determined by dividing the preferred dividend by the net issuance price for preferred stock. Not tax deductible.