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8. Marginal cost of capital (MCC) schedule As a company raises more and more funds, the cost of those funds begins to rise. As this
8. Marginal cost of capital (MCC) schedule As a company raises more and more funds, the cost of those funds begins to rise. As this occurs, the weighted cost of each new dollar rises. This is called the marginal cost of capital. A graph that shows how the weighted average cost of capital changes as more new capital is raised by the firm is called the MCc (marginal cost of capital) schedule. ? 12.0 11.8 11.6 11.4 11.2 11.0 10.8 10.6 10.4 10.2 0 20 40 60 80 100 120 140 160 Dollars of new capital raised ($ Millions) WACC (Percent) If this company raises $160M, its weighted average cost of capital is The breakpoints in the MCC schedule occur at of newly raised capital. Does the cost of capital schedule below match the MCC schedule depicted on the graph? No Yes if $50M Breakdown if $100M if $160M of funds: is raised is raised is raised After-Tax After-Tax After-Tax Capital Component Component Component Weight Amount Cost Amount Cost Amount Cost Source $22.5 $45.0 $72.0 Debt 6.0% 6.3% 6.5% 0.45 Preferred $2.5 $5.0 11.0% $8.0 0.05 11.0% 11.0% stock $25.0 $50.0 $80.0 16.25% Common 0.50 15.5% 16.03% equity Total capital $50.0 $100.0 $160.0 8. Marginal cost of capital (MCC) schedule As a company raises more and more funds, the cost of those funds begins to rise. As this occurs, the weighted cost of each new dollar rises. This is called the marginal cost of capital. A graph that shows how the weighted average cost of capital changes as more new capital is raised by the firm is called the MCc (marginal cost of capital) schedule. ? 12.0 11.8 11.6 11.4 11.2 11.0 10.8 10.6 10.4 10.2 0 20 40 60 80 100 120 140 160 Dollars of new capital raised ($ Millions) WACC (Percent) If this company raises $160M, its weighted average cost of capital is The breakpoints in the MCC schedule occur at of newly raised capital. Does the cost of capital schedule below match the MCC schedule depicted on the graph? No Yes if $50M Breakdown if $100M if $160M of funds: is raised is raised is raised After-Tax After-Tax After-Tax Capital Component Component Component Weight Amount Cost Amount Cost Amount Cost Source $22.5 $45.0 $72.0 Debt 6.0% 6.3% 6.5% 0.45 Preferred $2.5 $5.0 11.0% $8.0 0.05 11.0% 11.0% stock $25.0 $50.0 $80.0 16.25% Common 0.50 15.5% 16.03% equity Total capital $50.0 $100.0 $160.0
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