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

Question

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When determining the costs of each component of a firm's capital structure, the firm must evaluate the marginal costs of new funds, which are the costs of raising additional funds. This is because the cost of raising funds is likely to increase as the firm raises more capital, due to factors such as market conditions and the firm's creditworthiness. Thus, the marginal cost of capital is the appropriate measure for deciding whether to undertake a new investment, as it considers the additional cost that would be incurred if the firm were to raise more capital.

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