A company optimal budget is the amount of new capital required to take all projects with IRR greater than: MCC WACC Cost of new debt Cost of retained earnings Can somebody also explain difference between WACC and MCC ann siginficance of MCC? Thanks S
WACC is the cost of capital, if you didnt use the funds to invest in a certain project you theoretically could use it to pay down your WACC. MCC is your marginal cost of capital which is how expensive your next dollar of financing (from a debt or equity perspective) will be.
MCC if you look at the graph the optimal capital budget is where the investment opportunity schedule intersects the marginal cost of capital schedule.
aren’t MCC and WACC the same thing?
Yep, I also think MCC and WACC are just different names for the same thing
WACC is the cost of capital at a certain point in time, MCC is the cost of the next dollar. if you take on additional financing @ a higher MCC then your WACC will change
Ah yes, that makes sense. Thanks!
I hate to sound like I am picking on you here, but I have to disagree with you again. WACC is the weighted average of the marginal costs of financing for each type of financing used. I took this verbatim from my Level 2 corporate finance book. Therefore, they are the same thing.
“MCC is the cost of the next dollar” When we calculate WACC, we don’t use historical costs. We use the cost of financing under current market conditions, which would be the cost of the next dollar. For example, the market price of floating new bonds goes into the debt component of the WACC. I still think they both are essentially the same thing. Although, clarification would be appreciated.
thanks for the clarification wyantjs, would much rather know when I am thinking something wrong then going into the exam with bad knowledge!