Measuring the cost of capital needs a separate treatment. Needless to say, it is desirable to minimize the cost of capital. Hence, cheaper sources should be preferred, other things remaining same.

The cost of a source of finance is the minimum return expected by its suppliers. The expected return depends on the degree of risk assumed. A high degree of risk is assumed by shareholders than debt-holders. Debt-holders get a fixed rate of interest but shareholder's dividend is not fixed. The loan of debt-holders is returned within a prescribed period, while shareholders can get back their capital only when the company is wound up. This leads one to conclude that debt is a cheaper source of funds than equity. The preference share capital is cheaper than equity capital, but is not as cheap as debt. However, a company should not employ a large amount of debt. Theoretically, a company should have a right mix of debt & equity so that its overall cost of capital is minimum.