Skip to content

CS Executive · Corporate Accounting and Financial Management · Cost of Capital

In financial management, the marginal cost of capital (MCC) of a firm is best described as:

Marginal cost of capital is the weighted average cost of the additional funds a firm raises for a new investment, using target or marginal weights. It reflects the incremental cost of the next rupee of capital, not the historical average cost of capital already employed.

  1. AThe weighted average cost of all capital raised by the firm since incorporation
  2. BThe weighted average cost of the additional capital raised for a new investment, at the target weightsCorrect
  3. CThe cost of the cheapest single source of finance available to the firm
  4. DThe historical cost of equity multiplied by the book value of retained earnings

Explanation

MCC is the cost of raising one more rupee of capital, computed as the weighted average of the costs of the new funds raised, using marginal (target) weights. Option A describes the historical WACC based on past capital, not the incremental cost. The cheapest source alone ignores the financing mix.

Did you get it right without looking?

One question tells you little. A timed set on Cost of Capital shows your real accuracy, how long you take and where you lose marks.

Practise Cost of CapitalFree diagnostic mock

More Cost of Capital questions