What term describes the cost of capital obtained by issuing an additional dollar of new capital funds?
AMarginal Cost of Capital (MCC)
BWeighted Average Cost of Capital (WACC)
CCost of Retained Earnings
DHistorical Cost of Capital
Explanation
* Marginal Cost of Capital (MCC) is the cost of raising the next incremental unit of capital.
* MCC rises as capital budget expands due to flotation costs and increased debt risk premiums.
* Optimal capital budget is found where Investment Opportunity Schedule (IOS) intersects MCC curve.
Exam Relevance
- Topic: Corporate Finance
- Subtopic: Cost of Capital
No Comments