WACC and MCC

[thomas]

WACC and MCC

Date: September 1, 2008 07:28AM


Hello

In Q 22 of CFAI Reading 45 it asks for the marginal cost of capital for the company in question. The answer is then calculated using what I believe is the WACC formula - i.e
WACC= w(equity) x r(equity) + w(debt) x (1 - t) x r(debt)

So then I guess the marginal cost of capital the same thing as the WACC?? Err... how come?

[JG_AReader]

Date: September 1, 2008 10:25AM


WACC is used for making future decisions about funding. Assuming you pull in external capital to fund projects, the marginal rate is what's relevant here.

[stocker]

Date: September 1, 2008 10:45AM


correct me if i am wrong

marginal cost of capital is company's internal cost of capital (project related)and wacc is weighted avaerage cost of capital(incorporating capital structure)

[Phillips]

Date: September 1, 2008 12:16PM


Marginal cost of capital is the cost of raising extra capital. For small amounts, this is likely to be close to your WACC. For large amounts, it won't be.

[Roberts]

Date: September 1, 2008 02:36PM


they are different

[mt5pzt6]

Date: September 1, 2008 06:29PM


Well they may be different, but the question distinctly asks you to calculate the Marginal Cost of Capital and the answer is given as the WACC.

so basically when asked to show the MCC just show the WACC?

[hibea]

Date: September 1, 2008 06:41PM


The MCC is the last dollar of new capital the firm raises. If the firm use more that one type of new financing (i.e. equity and debt), the MCC represent a weighted average cost of the last dollar of capital raised.
The MCC and WACC are the same until the cost of capital component increases. This is why the graph of the MCC (with the WACC on the y-axis) is a discontinued line.
I hope this help.