Marginal Cost of Capital
Jump to navigation
Jump to search
A Marginal Cost of Capital is a cost of capital for the last monetary unit of raised capital.
- AKA: MCC.
- See: Weighted Cost of Capital, Raising Capital Task.
References
2014
- http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/marginal-cost-of-capital.asp
- QUOTE: The marginal cost of capital (MCC) is the cost of the last dollar of capital raised, essentially the cost of another unit of capital raised.
As more capital is raised, the marginal cost of capital rises. With the weights and costs given in our previous example, we computed Newco's weighted average cost of capital as follows:
- WACC = (wd)(kd)(1-t) + (wps)(kps) + (wce)(kce)
- WACC = (0.4)(0.07)(1-0.4) + (0.05)(0.021) + (0.55)(0.12)
- WACC = 0.084, or 8.4%
- We originally determined the WACC for Newco to be 8.4%. Newco's cost of capital will remain unchanged as new debt, preferred stock and retained earnings are issued until the company's retained earnings are depleted.