In financial terms, what is typically true about the costs of equity capital compared to debt?

The cost of equity capital is generally higher than the cost of debt for a number of reasons rooted in the risk-return relationship. Investors expect a higher return on equity because equity capital is riskier than debt. When a company takes on debt, it is obligated to make interest payments regardless of its financial performance, making debt a safer investment during stable conditions. In contrast, equity investors are last in line during asset liquidation, and they bear the operational risks of the business. Hence, they require a higher return to compensate for that added risk.

Additionally, since equity capital can fluctuate based on market conditions and the company's performance, investors typically factor in the potential volatility in their expected returns. Consequently, companies usually have to offer higher rates of return on equity to attract investors when compared to the fixed obligations of debt.

In summary, the inherent risks associated with equity investments and the nature of returns required by equity investors contribute to the cost of equity capital being higher relative to the cost of debt.