when considering the weighted average cost of capital companies may favor the financial option that is least expensive for example its cost of equity may be 8 while its cost of debt may be 4 assuming a company has a balanced capital structure 50 of each the company s total cost of capital is 6 
as a company goes out to seek additional capital it often compares which method is cheaper than its weighted average cost of capital in this case the company s average debt costs less so the company may be opposed to issuing additional equity at a higher cost 