~ Capital source with cost of capital in the order of Highest to Lowest :

~ Explanation:

~ Equity shareholders assume the highest amount of risk when they invest in the equity of a company. Equity shareholders are not entitled to a fixed rate of dividend from the beginning. The company pays dividends to equity holders only if the company has excess retained earnings after providing for fixed obligations of debt and preferred stock and after retaining for the growth of the company. Equity holders are also the last priority in payment of claims at the time of liquidation of the company.

~ Therefore, since equity holders assume the highest risk, the cost of capital for equity capital is the highest.

~ Debt holders assume the lowest amount of risk, since they receive fixed interest, and are also on the priority above equity and preferred for payment of dues at the time of liquidation of the company. Therefore, since debt holders assume lowest risk, cost of debt capital is the lowest.

~ Preferred stock is in the middle of equity and debt in terms of risk and reward. Preferred stock holders asssume lower risk than equity because preferred dividends are fixed and their dues are preferred over equity. However, the risk of preferred stock is higher than debt because the claims of preferred stock are provided for after the claims of debt; therefore, higher risk than debt. Therefore, preferred capital cost is lower than equity, and higher than debt.