[winslowww]

Simply put, in the WACC why is it that the cost of debt is always assumed to be lower then the cost of equity even before tax.

[ArcSine]

The cost of any layer in the capital structure (pfd stock, common stock, a bond issue, etc.) is driven by the return required by the security holder (pfd stockholders, common stockholders, bond holder).

In general, debt has seniority / priority over equity when it comes to payouts, and in liquidation.

Now to answer your question, put those two preceding facts together and see where it takes you.

[donkeymoney]

Equity prices in a great deal of risk. Debtors, however, will only not be paid in the event of bankruptcy, if say, the stock price goes to zero (or below, theoretically speaking). Even at bankruptcy, the debtor can still collect a fraction of the amount owed. The stock owner loses all money as the stock price goes to zero. Thus, you have to pay the equity owners more to give you money.