Marginal Cost of Capital

Marginal Cost of Capital:

It is the cost of raising one more unit of capital. When company raises more capital, cost of capital will too raise. Assume, your cost of capital is 10% (i.e., average) for rising from share capital, debt and public deposit. However if you are interested to increase one more dollar, you have to reimburse additional cost and this cost will be the marginal cost of capital.

When company is raising fund via issuing new equity shares, subsequent schedule of marginal cost of capital will apparent this concept.

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When company has adequate retained earnings, then company can utilize this. With this, weighted average cost it will be almost equivalent to marginal cost of capital. Now, question is how to compute marginal cost of capital. For computing marginal cost of capital, we observe both our present cost of capital and risk level. We have to provide high cost of capital when we use this money for uncertain project.

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