When determining the costs of each component of a firm's capital structure, the firm must evaluate the:

Question

Quizplus · Accepted Answer

When determining the costs of each component of a firm's capital structure, the firm must evaluate the marginal costs of new funds because this represents the cost of raising an additional dollar of capital. The total cost of new funds combines the costs of different sources of funding, so it is not as useful for evaluating the costs of each component separately. The average costs of new funds are also not as useful because they may not accurately reflect the costs of specific sources of funding. Additionally, evaluating the average costs of old and new funds would not provide relevant information for determining the costs of each component of the capital structure alone.

When Determining the Costs of Each Component of a Firm's