How do you calculate the marginal value of capital with the

How do you calculate the marginal value of capital with the additional $1 million in investment?

Solution

The answer;

The marginal cost of capital is the cost of the last dollar of capital raised which is essentially the cost of another unit of capital raised.As more capital is raised ie additional $1 million the marginal cost of capital will rise.

With weights which and cost the formula for weighted average cost of capital is defined as follows:

WACC = (w_d)(k_d)(1-t) + (w_ps)(k_ps) + (w_ce)(k_ce)

where the Wd=weights of the debt combined

Kd=cost of Debt and (1-t)= after tax cost fo debt.

Wps=Weights of the preferred stock

Kps=cost of preferred stock

Wce=weights of the retained earnings

kce=cost of the retained earnings

So the cost of capital will remain unchanged as new debt,preferred stock or retained earnings are issed until the company retained earnings are depleted.