A firm can raise up to $700 million for investment from a mixture of debt, preferred stock and...

Question:

A firm can raise up to $700 million for investment from a mixture of debt, preferred stock and retained equity. Above $700 million, the firm must issue new common stock. Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up to $700 million will be _____ the marginal cost of capital for amounts over $700 million.

a. less than

b. equal to

c. greater than

d. cannot be determined from the information given

Marginal Cost of Capital:

The marginal cost of capital is the cost a firm must bear for raising another dollar of capital. It is forward looking and usually differs from a firm's historical cost of capital.

Answer and Explanation: 1

The answer is a. less than. Generally, common stock is the most expensive form of capital. So, issuing additional stock is likely to result in a higher cost of capital, relative to the existing level.


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Cost of Capital: Flotation Cost, NPV & Internal Equity

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Chapter 3 / Lesson 18
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How does a business figure out the true cost and best means of obtaining capital? In this lesson, we will explore the cost of capital, flotation cost, net present value, and internal equity to help answer that question.


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