WACC and MCC
Date: September 1, 2008 07:28AM
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?
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)
Date: September 1, 2008 02:36PM
they are different
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?
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.