weighted average cost of capital capital

wonderfuldream

WACC(weighted average cost of capital) is also referred to as MCC (marginal cost of capital).

This is where I am a bit confused.

When a question asks you to calculate WACC/MCC should you put any weight on a company's existing debt structure? Or do you only consider the weighting of the new debt the company is about to acquire?

Weighted average cost of capital sounds like you need to consider the cost of all debt, new and old.

Marginal cost of capital sounds like you only need to consider cost of new debt.

The answers to EOC questions are not consistent on this matter.

dcfox83

I am more inclined to agree that the correct meaning is to consider only new debt that a company takes on for it's investment program. This meaning is consistent with everything in the reading.

However the answer to EOC question 22 is inconsistent to this meaning. All other EOC questions are fine.

Penny-wenny

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Edited 1 time(s). Last edit at Thursday, April 21, 2011 at 12:32AM by AndyNZ.

Bluetick1010

from investopedia....seems like MCC is higher than WACC as company continues to raise capital

MCC Vs. WACC
The marginal cost of capital is simply the weighted average cost of the last dollar of capital raised. As mentioned previously, in making capital decisions, a company keeps with a target capital structure. There comes a point, however, when retained earnings have been depleted and new common stock has to be used. When this occurs, the company’s cost of capital increases.

kamara5

> you need to consider the cost of all debt, new and old

Be careful. The joke among finance professors is "the cost of capital has nothing to do with the cost of capital" (where the former references WACC's cost of debt, and the latter referencing the interest you pay for current debt). Specifically:

+ current coupons on existing debt are irrelevant (they reflect old Treasury rates, credit spreads, credit rating, etc.)
+ if all existing debt (plus any new anticipated debt) were repriced today, what would it cost?

In this sense, the marginal cost is equal to the "cost" of all of your debt if it were issued -- and fairly priced -- today. That value is your "cost of debt". (Even if a firm is never issuing new debt, its cost of debt is changing all the time.)

> The marginal cost of capital is simply the weighted average cost of the last dollar of capital raised

I'd say "..of the next dollar of capital raised" -- since the last dollar may have been raised years ago.