Marginal cost of capital

Question

Quizplus · Accepted Answer

Marginal cost of capital is the cost of the next dollar of financing, and it recognizes that the cost of capital will increase as more funds are raised. This means that the cost of the last dollar raised will be higher than the cost of the first dollar raised. This is important to consider when making capital budgeting decisions because it may affect the overall profitability of the project. Therefore, option A is the correct answer. Option B is incorrect because the marginal cost of capital accounts for the cost of each new dollar raised, not just the weighted average. Option C is incorrect because the marginal cost of capital can be calculated regardless of whether or not retained earnings are available.

Marginal Cost of Capital