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How do you figure out the marginal cost of capital?

Updated: 8/18/2019
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14y ago

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Depending on the capital: i.e. Let's say the capital is a product of your firm such as hammers. To determine the marginal cost, you have to figure out how much it costs to produce 1 unit (or hammer). To determine this, you divide the Total Cost (which is the sum of Total fixed Costs and Total variable costs) by the quantity of units that you are producing. Therefore, if your total cost equals $1000, and you produce 50 hammers, then your marginal cost is $20 because it costed you $20 per hammer.

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Q: How do you figure out the marginal cost of capital?
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What is the concept of marginal cost of capital?

The marginal cost of capital (MCC) is the cost of the last dollar of capital raised, essentially the cost of another unit of capital raised. As more capital is raised, the marginal cost of capital rises.


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This is because if a marginal figure is less than an average figure, the new average figure will decrease.


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Take the first-order derivative of the cost of capital function.


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What is advantage of using the marginal cost of capital as a company's average hurdle rate?

Using a hurdle rate can help take the emotion out of defining capital value. This is the advantage of using the marginal cost of capital as the hurdle rate.


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