The relevant capital components are equity and long-term debt

The first task in estimating a business’s corporate cost of capital is to determine which sources of capital on the liabilities and equity side of the balance sheet should be included in the estimate. In general, the corporate cost of capital focuses on the cost of permanent capital (long-term capital) because these are the sources used to finance capital asset acquisitions. Thus, for most firms, the relevant capital components are equity and long-term debt. Typically, short-term debt is used only as temporary financing to support seasonal or cyclical fluctuations in volume, and hence it is not included in the cost of capital estimate. However, if a firm does use short-term debt as part of its permanent financing mix, then such debt should be included. As discussed in Chapter 16, the use of short-term debt to finance permanent assets is highly risky and is not common under normal conditions.

Tax Effects