Which statement accurately describes the cost of debt versus the cost of equity?

The correct statement indicates that the cost of equity is typically higher than the cost of debt due to tax benefits. This is grounded in the fundamental principles of corporate finance.

When a company raises debt, the interest payments are often tax-deductible, which effectively reduces the overall cost of borrowing. As a result, the net cost of debt can be lower than the cost of equity. In contrast, equity investors require a higher return on their investment to compensate for the increased risk they bear compared to debt holders. This is because equity holders are last in line to receive any payouts in the event of liquidation and have no guaranteed returns like interest payments. Therefore, the expected return for equity holders is typically higher to reflect the greater risk, leading to a greater cost of equity in comparison to the cost of debt.

In summary, the cost of equity is usually higher than that of debt, primarily due to the tax advantages associated with debt financing and the inherent risk profile associated with equity investments.