• 107328  Infos

Marginal cost of capital schedule

    Marginal Cost of Capital (MCC) Schedule is a graph that relates the firm’s weighted average cost of each dollar of capital to the total amount of new capital raised
    The WACC is the minimum rate of return allowable and still meeting financial obligationts such as debt interest payments dividends etc Therefore the WACC averages the required returns from all long-term financing sources (Debt and Equity)
    the WACC is based on cash flows which are after-tax By the same notion then the WACC should be calculated on an after-tax basis

    WACC Components

    DEBT
    Advantages:Disadvantages:taking on more debt = taking on more financial risk (more systematic risk) requiring higher cash flowsThe firm's debt component is stated as kd and since there is a tax benefit from interest payments then the after tax WACC component is kd(1-T); where T is the tax rateEquity
    Advantages:
    - no legal obligation to pay (depends on class of shares)Disavdantages:
    - new equity dilutes current ownership share of profits and voting rights (control)buyout by another firmCost of new equity should be the adjusted cost for any underwriting fees terme flotation costs (F)
    Ke = D1/P0(1-F) + g; where F = flotation costs D1 is dividends P0 is price of te stock and g is the growth rate
    More to come (K preferred shares WACC equation EVA MCC MCC schedule and demonstration IOS schedule and demonstration MCC/IOS schedules)