Marginal cost of capital
Marginal cost focuses on additional funding, whereas average cost describes the weighted cost of an existing or planned financing mix. New borrowing may carry a different rate because market conditions, credit risk or lender limits have changed. New share issues can incur costs and affect the capital structure. Marginal costs may rise in steps as cheaper sources are exhausted. Investment decisions should consider the appropriate forward-looking cost, but the label does not mean that a project should be assessed using only the cost of whichever financing instrument happens to be raised for it.
Worked example
A company can borrow its next $500,000 at 6%, but further borrowing would cost 8% because a lending threshold is exceeded. The marginal debt cost changes at that point. Whether either figure alone is an appropriate project discount rate depends on the project's overall financing and risk assumptions.
Common mistake
Using the historical coupon on old borrowing as the cost of new finance, or using debt cost alone for an equity-and-debt-funded project.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |