Anda di halaman 1dari 4

3/11/2017 MarginalCostofCapitalCFALevel1|Investopedia

Topics Reference Advisors Markets Simulator

Search News, Symbols, Terms Newsletters

Marginal Cost of Capital


By Investopedia

You May Also Like: Find the right mortgage for you

Chapter 1 - 5 Chapter 6 - 10 Chapter 11 - 15 Chapter 16 - 17

11. Corporate Finance 11.8 Marginal Cost of Capital

12. Securities Markets 11.9 Factors Affecting the Cost of Capital

13. Equity Investments 11.10 Payback Period

14. Fixed Income Investments 11.11 Net Present Value (NPV) and the Internal Rate of Return (IRR)

15. Derivatives 11.12 The NPV Profile

11.13 Cash Flow and NPV Applications

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. Frequently Asked Questions
With the weights and costs given in our previous example, we computed Newco's weighted average What is the difference between a capital good and a
cost of capital as follows: consumer good?

What is a derivative?
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) What is an economic moat?

WACC = 0.084, or 8.4%


What's the difference between limited liability
partnership and general partnership?
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.

Example: Marginal Cost of Capital


Once retained earnings are depleted, Newco decides
to access the capital markets to raise new equity. As
in our previous example for Newco, assume the
company's stock is selling for $40, its expected ROE is
10%, next year's dividend is $2.00 and the company
expects to pay out 30% of its earnings. Additionally,
Apply For Home Loan.
assume the company has a flotation cost of 5%.
Get 5,000 GiftCard On Disbursal.
Interest Rate Starting @8.6%. Newco's cost of new equity (kc) is thus 12.3%, as
bankbazaar.com
calculated below: Trading Center

kc = 2 + 0.07 = 0.123, or 12.3%


40(1-0.05)

Answer:
Using this new cost of equity, we can determine the WACC as follows:

WACC = (wd)(kd)(1-t) + (wps)(kps) + (wce)(kce) Partner Links


WACC = (0.4)(0.07)(1-0.4) + (0.05)(0.021) + (0.55)(0.123) Learn to trade stocks by investing $100,000 virtual
WACC = 0.086, or 8.6% dollars...

The WACC has been stepped up from 8.4% to 8.6% given Newco's need to raise new equity.

http://www.investopedia.com/examguide/cfalevel1/corporatefinance/marginalcostofcapital.asp 1/4
3/11/2017 MarginalCostofCapitalCFALevel1|Investopedia
Figure 11.1
Topics Reference Advisors Markets Simulator

Search News, Symbols, Terms Newsletters

Look Out!
At some point, as the company continues to raise capital, the MCC can be higher than the WACC.

MCC Vs. WACC


The marginal cost of capital is simply the weighted average cost of the last dollar of capital raised. As
mentioned previously, in making capital decisions, a company keeps with a target capital structure.
There comes a point, however, when retained earnings have been depleted and new common stock
has to be used. When this occurs, the company's cost of capital increases. This is known as the
"breakpoint" and can be calculated as follows:

Formula 11.9

Breakpoint for retained earnings = retained earnings


wce

Example:

For Newco, assume we expect it to earn $50 million next year. As mentioned in our previous
examples, Newco's payout ratio is 30%. What is Newco's breakpoint on the marginal cost curve, if
we assume wce = 55%?

Answer:
Newco's breakpoint = $50 million (1-0.3) = $63.6 million
0.55

Thus, after Newco raises roughly $64 million of total capital, new common equity will need to be
issued and Newco's WACC will increase to 8.6%.

Factors that affect the cost of capital can be categorized as those that are controlled by the company
and those that are not.

Find out if you're ready to buy a house


With Investopedia's Readiness Scores, you'll be able to know if you're financially ready to buy a
house. Find out if you're ready to make this big move!

Next: Factors Affecting the Cost of Capital

RELATED ARTICLES
INVESTING
Investors Need A Good WACC
Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality.
http://www.investopedia.com/examguide/cfalevel1/corporatefinance/marginalcostofcapital.asp 2/4
3/11/2017 MarginalCostofCapitalCFALevel1|Investopedia
Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality.

Topics Reference Advisors Markets Simulator

Search News, Symbols, Terms Newsletters

INVESTING
DCF Valuation: The Stock Market Sanity Check
Calculate whether the market is paying too much for a particular stock.

INVESTING
How to Calculate Required Rate of Return
The required rate of return is used by investors and corporations to evaluate
investments. Find out how to calculate it.

PERSONAL FINANCE
Top Things To Know For An Investment Banking Interview
Without some basic knowledge, you won't get the job. Find out what you need to
know and how to prepare.

INVESTING
Target Corp: WACC Analysis (TGT)
Learn about the importance of capital structure when making investment
decisions, and how Target's capital structure compares against the rest of the
industry.

INVESTING
Evaluating Retained Earnings: What Gets Kept Counts
A company's retained earnings matter. Be investment-savvy and learn how to
analyze this often overlooked information.

INVESTING
Breaking Down Optimal Capital Structure
An optimal capital structure shows the best balance of debt to equity a company
can have in order to minimize its cost of capital.

INVESTING
Apple's $12 Billion Bond Issue Meant to Boost WACC
Apple, Inc. announced that it would issue $12 billion in corporate bonds to the
public in order to return profits to shareholders via dividends and a share
buyback program of equivalent size.

Search Investopedia

DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X

CONTENT LIBRARY CONNECT WITH INVESTOPED


Articles Terms
Stock Simulator
Videos
FXtrader
Guides Slideshows
Exam Prep Quizzer
FAQs Calculators
Net Worth Calculator
Chart Advisor Stock Analysis
HcrI
http://www.investopedia.com/examguide/cfalevel1/corporatefinance/marginalcostofcapital.asp 3/4
3/11/2017 MarginalCostofCapitalCFALevel1|Investopedia
WORK WITH INVESTOPEDIA GET FREE NEWSLETTE
About Us Advertise With Us Write For Us Topics
Contact Us Reference
Careers Advisors Markets Simulator Newsletters

Search News, Symbols, Terms Newsletters

2017, Investopedia, LLC. All Rights Reserved Terms Of Use Privacy Policy

http://www.investopedia.com/examguide/cfalevel1/corporatefinance/marginalcostofcapital.asp 4/4