# Explanation of Break Points (Cost of Capital)

I find both Schweser and CFAi texts to be completely opaque on this topic. Anyone feel they can explain it better?

Consider a marginal cost of capital schedule. It will look like a staircase heading upward. On the horizontal axis is the amount of capital raised, and on the vertical axis is the weighted-average cost of capital. In this particular case, the more you capital you raise the more expensive it becomes. Each time one of these “stairs” is present there is an increase in the cost of capital. A breaking point is essentially how much capital you can raise until there is a change in the cost of capital given a particular cost schedule and capital structure. The concept is explained pretty well (with an example) on page 65 in CFAI Book #4.

mcf, check out this link, about 75% of the way down the page you’ll see the marginal cost of capital. Let me know whether this clarifies things otherwise I can help with a more specific question. http://www.fiu.edu/~deboyrie/WebCTFIN3403/Notes/chapter9.html