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Marginal Cost of Capital Calculator

Marginal Cost of Capital Formula:

\[ MCC = WACC \text{ at new capital level} \]

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1. What is Marginal Cost of Capital?

The Marginal Cost of Capital (MCC) is the cost of obtaining one additional dollar of new capital. It represents the weighted average cost of capital (WACC) at each new level of financing and typically increases as more capital is raised.

2. How Does the Calculator Work?

The calculator uses the WACC formula at new capital levels:

\[ MCC = (Cost\ of\ Debt \times (1 - Tax\ Rate) \times Debt\ Ratio) + (Cost\ of\ Equity \times Equity\ Ratio) \]

Where:

Explanation: The formula accounts for the tax shield on debt and weights each component by its proportion in the capital structure.

3. Importance of MCC Calculation

Details: MCC is crucial for capital budgeting decisions as it represents the hurdle rate that potential projects must exceed to be considered viable. It helps determine the optimal capital budget size.

4. Using the Calculator

Tips: Enter all costs and ratios as decimals (e.g., 0.08 for 8%). Ensure debt and equity ratios sum to 1. All values must be between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: Why does MCC typically increase with more capital?
A: As firms raise more capital, they exhaust cheaper sources first (like retained earnings), then must use more expensive sources (like new equity).

Q2: How does MCC differ from WACC?
A: WACC is the average cost of all capital, while MCC is the cost of the next dollar of capital. MCC is more relevant for investment decisions.

Q3: What affects the cost of equity?
A: Risk-free rate, market risk premium, and the company's beta are key factors in CAPM models.

Q4: Should I use book or market values for ratios?
A: Market values are preferred as they reflect current costs of capital.

Q5: How often should MCC be recalculated?
A: Whenever capital structure changes significantly or market conditions affect costs of capital.

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