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COST OF CAPITAL
Marginal cost of capital
• If additional finance is needed for a new project it is
assumed a company will raise additional finance so as
to keep the existing capital structure constant.
• Therefore initially the WACC and the marginal cost of
capital will be the same.
• However, at some point it may be necessary to issue
new shares to raise equity finance (if the company has
invested all its retained earnings for the year).
• This new equity will have a higher cost than retained
earnings. The marginal cost of capital will then
increase.
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