The MCC schedule is either horizontal or rising, which implies that the cost of capital to a firm increases as it raises larger and larger amounts of capital. The rising section of the MCC schedule:
A) is caused by economies of scale in financing.
B) would be horizontal if the firm retained all of its earnings.
C) results from a change in the debt ratio as the firm expands.
D) occurs because the firm must, if it is to expand, be willing to take on riskier projects
E) results from flotation costs associated with the sale of new common and preferred stock, along with higher debt costs, as the firm's rate of expansion increases.

Question

Quizplus · Accepted Answer

The rising section of the MCC schedule is a result of the flotation costs associated with the sale of new common and preferred stock, along with higher debt costs, as the firm's rate of expansion increases. As the firm raises larger amounts of capital, the costs of raising that capital increase due to these factors.

The MCC Schedule Is Either Horizontal or Rising, Which Implies