Page 31 - FINAL CFA SLIDES DECEMBER 2018 DAY 11
P. 31
Session Unit 10:
36. Cost of Capital
LOS 36.d: Explain how the marginal cost of capital and the investment opportunity schedule are
used to determine the optimal capital budget., p44
MCC increases with new capital raised/invested
due to increasing financial gearing and/or flotation
costs for new equity compared to retained earnings!
IOS decreases with
higher Project IRR
(higher hurdle rate or
higher minimum rate tanties
to get NPV = 0), hence
lower new capital
raised/ invested and
lower IRR and vice
versa! MCC < IRR
–bad, go
beyond! MCC > IRR –good beyond here but capital is scarce!
