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Marginal Cost of Capital

Marginal Cost of Capital - F4310 period, constant...

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10/20/2009 1 Marginal Cost of Capital F4310 Marginal Cost of Capital As the firm uses more financing within a period, the cost of capital does not stay constant. Internal equity financing (retained earnings is less expensive than external equity financing (issuing new shares) because there is no flotation cost. Debt financing is less expensive than equity financing. Using more debt makes the firm more risky, making all additional financing more costly.
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10/20/2009 2 Breaks in the Cost of Capital Schedule Rate of Return Cost of Capital A C D E $ Invested B Marginal Cost of Capital, Example 10% Stock Preferred 30% Debt : structure capital target following the has Company W The it l f t th of each of costs estimated The 34%. is rate tax marginal s firm' The earnings. retained from available financing of million $12 have to expects firm the period, planning upcoming the During 100% Total 60% Stock Common 12.6% Common New of Cost 11.6% Earnings Retained of Cost 10.4% Stock Preferrred of Cost 8.2% debt of cost tax Before : are capital of components the
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