(a) the components of financing: Debt, Equity or Preferred stock
(b) the cost of each component
! In summary, the cost of capital is the cost of each component weighted by its
relative market value.
WACC = ke (E/(D+E)) + kd (D/(D+E))
The cost of capital is the weighted average of the cost of all the different sources
of financing.
Preferred stock, which is not debt (because preferred dividends are not tax
deductible) and not equity (because preferred dividends are fixed) is best treated
as a third item on the cost of capital computation, with its own cost. The simplest
measure of this cost is the preferred dividend yield. (Preferred
