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#cfa-level-1 #corporate-finance #reading-36-cost-of-capital
A company’s marginal cost of capital (MCC) may increase as additional capital is raised, whereas returns to a company’s investment opportunities are generally believed to decrease as the company makes additional investments, as represented by the investment opportunity schedule (IOS).
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2.3. Applying the Cost of Capital to Capital Budgeting and Security Valuation
cost of capital estimate is in capital-budgeting decision making. What role does the marginal cost of capital play in a company’s investment program, and how do we adapt it when we need to evaluate a specific investment project? <span>A company’s marginal cost of capital (MCC) may increase as additional capital is raised, whereas returns to a company’s investment opportunities are generally believed to decrease as the company makes additional investments, as represented by the investment opportunity schedule (IOS).2 We show this relation in Figure 1, graphing the upward-sloping marginal cost of capital schedule against the downward-sloping investment opportunity schedule. In the context of a compa


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