Marginal Cost of Capital

Which of the following is true of the Marginal Cost of Capital (MCC) ?

MCC will affect the current WACC MCC of capital raised using debt is the sum of contractual obligations such as interest payments and fees.

Which of the following is a piece of information you would need to determine the MCC for a new stock issue by Apex?

Return on the market

In the case of a new stock issue, the MCC is equal to the __________.

cost of equity . required rate of return expected by investors

A marginal cost of capital below the existing WACC for Apex will cause a(n)

decrease

A marginal cost of capital above the existing WACC for Apex will cause a(n)

increase

As more capital is raised, the marginal cost of capital will

increase

A marginal cost of capital (MCC) above the weighted average cost of capital (WACC) will __________.

increase investors' expectations

The Apex Printing Inc. board of directors has recently completed its multiyear strategic plan. The Chief Executive Officer (CEO), John Matthews, and the VP of Sales and Administration, James Simeon, meet with you and Mary Francis to discuss it. Included in the plan is an intent to diversify Apex's current product line to include food packaging. Additional investment is required for this expansion, and equipment and inventory will need to be procured and placed in service. The board reviewed the return on equity (ROE) of the possible projects and chose the projects above the WACC because they will __________.

increase the value of the firm

An increase in the WACC resulting from a high MCC can __________.

impact other operations' decisions

The marginal cost of capital tends to increase as more capital is raised; this is a result of __________.

the risk-reward return tradeoff

A change in which factors could impact the MCC for a new stock issue by Apex?

10-year Treasury bond rate Overall return of the market

Currently, Apex is only marginally profitable, and as such, the Chief Financial Officer (CFO), Mary Francis, has indicated that external financing will be required to support a company expansion into a new segment of the printing sector: food packaging. This endeavor will require new investments in equipment as well as substrate inventory; promotional costs will also increase. In addition, Timothy Russell, the new Audit Committee Chair, has pointed out that the company's compliance with the requirements of the Sarbanes-Oxley Act (SOX) will also cause administrative costs to increase. Following the requirements is paramount to successfully file a registration statement and to issue equity to shareholders in an initial public offering (IPO). Which three items did Mary provide to you to calculate the marginal cost of capital for the new stock issue?

Beta, return on the market, and risk-free rate

As the newly hired VP of finance, you report to the CFO. In this capacity, your responsibilities include preparation of financial statements, comparative analysis and benchmarking to sector performance, and the assessment of new business investment opportunities to grow Apex's expansion endeavors in a challenging market. Mary asks you to handle a meeting with the board about the significance of the marginal cost of capital (MCC). Which of the following are important issues with respect to the MCC?

Changes may be needed in investment and dividend policy.