Marginal Cost ndInvestment Decisions
 
The
firm’s financing costs and investment returns will be
affected by the volume of financing and investment undertaken.
The weighted marginal cost of capital and the investment opportunities schedule are mechanisms whereby financing and investment decisions can be made simultaneously.
 
The Weighted Marginal Cost of Capital (WMCC)
Themarginalcostofcapital(MCC)isdefinedasthecostofthelastdollarofnewcapitalthefirmraises,andthemarginalcostrisesasmoreandmorecapitalisraisedduringagivenperiod.
 Asthevolumeoffinancingincreases,thecostsofthevarioustypesoffinancingwillincrease,raisingthe
 firm’s
weightedaveragecostofcapital.Therefore,itisusefultocalculatetheweightedmarginalcostofcapital(WMCC),whichissimplythe
 firm’s
weightedaveragecostofcapital(WACC)associatedwithitsnextdollarototalnewfinancing
 
Calculating WMCC:
Finding Break Points
The level of
total
new financing at which the cost of one of the financing components rises, thereby causing an upward shift in the
weighted marginal cost of capital (WMCC).
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