Use of the marginal cost of capital
A) acknowledges that when retained earnings are used up as a source of equity, the cost of capital rises as new common stock is sold to support more growth.
B) recognizes that the return from the last dollar of funds generated should be greater than or equal to the cost of the last dollar of funds raised.
C) acknowledges that when retained earnings are used up as a source of equity, the cost of capital rises as new common stock is sold to support more growth and recognizes that the return from the last dollar of funds generated should be greater than or equal to the cost of the last dollar of funds raised.
D) None of these options are correct.

Question

Quizplus · Accepted Answer

The use of the marginal cost of capital involves both acknowledging that the cost of capital increases when retained earnings are depleted, and recognizing that the return on the last dollar of funds generated must be greater than or equal to the cost of raising the last dollar of funds. Therefore, choice C contains both parts of the explanation and is the best option.

Use of the Marginal Cost of Capital