Page 26 - FINAL CFA I SLIDES JUNE 2019 DAY 10

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,
hence lower new
capital raised/invested; tanties
The reverse is true!

MCC < IRR
–good, go
beyond! MCC > IRR –bad beyond here but capital is scarce!