The marginal cost of capital MCC) is the discount rate which represents the marginal cost of investment funds to the firm, and:
A) is calculated as a weighted average of the after-tax cost of the last dollar raised from each source.
B) is calculated as a weighted average of the after-tax cost of all funds used in the capital budget.
C) is calculated as a weighted average of the before-tax cost of the last dollar raised from each source.
D) calculated as a weighted average of the before-tax cost of all funds used in the capital budget.
E) is calculated as a weighted average of the after-tax cost of funds raised from bank and bond borrowings.

Question

Quizplus · Accepted Answer

The marginal cost of capital (MCC) is the cost of raising the next dollar of capital, and it is calculated as a weighted average of the after-tax cost of the last dollar raised from each source. This is because the cost of capital is the opportunity cost of the next best alternative investment, and the after-tax cost reflects the true cost of using the funds for investment. The other answer choices either include all funds used in the capital budget or use the before-tax cost, which do not accurately reflect the cost of raising the next dollar of capital.

The Marginal Cost of Capital MCC) Is the Discount Rate