Hi guys, just want to check if WACC and MCC are both the same thing? In the kaplan notes under LOS 45b, it state that the discount rate is the firm’s weighted average cost of capital (WACC) and is also referred to as the marginal cost of capital (MCC). I have this question from the 2009 CFA mock exam: a company optimal capital budget is best described as the amount of new capital required to undertake all projects with an internal rate of return greater than the: a) marginal cost of capital b) cost of new debt capital c) weighted average cost of capital the correct ans is a. Just like to confirm if wacc is mcc. If it is, how does this theory apply to this question? thanks
Marginal cost of capital is basically addition to the cost due to the new project. WACC is for all projects running by company. If MCC and WACC both are given in the question, I would say choose MCC as MCC is more appropriate for choosing the new project, especially when “optimal” word is given in the question. WACC might not yield the correct decision as it could be either very low or very high. However, most of the time you undertake only those projects which are of same risk so WACC and MCC should ideally be same in general.