The optimal capital budget occurs at the point where two curves intersect. Which of the following is/are one of those curves?
I. Weighted marginal cost of capital curve
II. Investment opportunity curve

Question

Quizplus · Accepted Answer

The optimal capital budget occurs where the weighted marginal cost of capital (WACC) curve intersects with the investment opportunity curve. The WACC curve represents the cost of financing (debt and equity) for each additional dollar of investment, while the investment opportunity curve represents the internal rate of return of potential projects. The intersection of these two curves represents the point where the cost of financing is equal to the return on investment, and therefore represents the most efficient allocation of capital.

The Optimal Capital Budget Occurs at the Point Where Two