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Chapter 4: Q11-13DQ (page 360)

What is the concept of marginal cost of capital?

Short Answer

Expert verified

The marginal cost of capital is the weighted average cost of new capital computed by the marginal weight. The marginal weight addresses the proportion of different sources of funds to be employed in raising extra funds.

Step by step solution

01

Introduction to the concept of cost of capital

The concept of the cost of capital is significant information used to determine a project's obstacle rate. An organization setting out on a significant project must know how much money the project will have to generate in order to offset the cost of undertaking it and then continue to creating profits for the organization.

02

The concept of marginal cost of capital

The Marginal Cost of Capital (MCC), sometimes addressed as the Opportunity Cost of Capital (OCC) or Weighted Average Cost of Capital (WACC), tells about how much is paid for the financing. It will help in determining the required return for the investment projects.In particular, under two fundamental assumptions, the Marginal Cost of Capital will be the required return that is used while performing capital budgeting analysis.

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Most popular questions from this chapter

Larry Davis borrows $80,000 at 14 percent interest toward the purchase of a home. His mortgage is for 25 years.

a.How much will his annual payments be? (Although home payments are usually on a monthly basis, we shall do our analysis on an annual basis for ease of computation. We will get a reasonably accurate answer.)

b.How much interest will he pay over the life of the loan?

c.How much should he be willing to pay to get out of a 14 percent mortgage and into a 10 percent mortgage with 25 years remaining on the mortgage?

Assume current interest rates are 10 percent. Carefully consider the timeb value of money. Disregard taxes.

What two conditions must be met to go from Formula 10-7 to Formula 10-8 in using the dividend valuation model?

P0=D1Ke-g....................(10-8)

If inflationary expectations increase, what is likely to happen to the yield to maturity on bonds in the marketplace? What is also likely to happen to the price of bonds?

Why is the remaining time to maturity an important factor in evaluating the impact of a change in yield to maturity on bond prices?

Cal Lury owes $10,000 now. A lender will carry the debt for five more years at 10 percent interest. That is, in this particular case, the amount owed will go up by10 percent per year for five years. The lender then will require that Cal pay off the loan over the next 12 years at 11 percent interest. What will his annual payment be?
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