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MCC

The document presents a Marginal Cost of Capital (MCC) schedule for a hypothetical company, detailing its capital structure with debt, equity, and preferred stock. It outlines breakpoints for switching to more expensive capital sources and emphasizes the importance of selecting projects with an Internal Rate of Return (IRR) that meets or exceeds the MCC. The MCC schedule aids in making informed investment decisions based on financing costs.

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13 views2 pages

MCC

The document presents a Marginal Cost of Capital (MCC) schedule for a hypothetical company, detailing its capital structure with debt, equity, and preferred stock. It outlines breakpoints for switching to more expensive capital sources and emphasizes the importance of selecting projects with an Internal Rate of Return (IRR) that meets or exceeds the MCC. The MCC schedule aids in making informed investment decisions based on financing costs.

Uploaded by

afshanamin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Here’s a sample Marginal Cost of Capital (MCC) schedule for a

hypothetical company, visualized as a step-up graph:

📊 MCC Schedule Breakdown

Capital Structure Assumptions:

 Debt: 40% of capital, initial cost 6%, new cost 7%, limit \$400,000

 Equity: 40% of capital, initial cost 10%, new cost 12%, limit \$300,000

 Preferred Stock: 20% of capital, constant cost 8%, no limit

🔹 Breakpoints:

 Debt Breakpoint: \$400,000 / 0.4 = \$1,000,000

 Equity Breakpoint: \$300,000 / 0.4 = \$750,000

These breakpoints indicate when the company must switch to more


expensive sources of capital.

📈 MCC Step-Up Graph

Each horizontal segment shows the WACC (used as MCC) for a range of
capital raised. As cheaper sources are exhausted, the MCC increases.
✅ How This Helps in Project Selection

 Projects with IRR ≥ MCC at the relevant capital level should be


accepted.

 This ensures the company only invests in projects that generate


returns higher than the cost of financing.

Would you like to customize this example with your own capital structure or
project IRRs to simulate decision-making?

References

[1] CodeInterpreter

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