Financial Management, Essay Example

What is the weighted marginal cost of capital (WMCC)? What does the WMCC schedule represent? Do you believe this is always accurate?

Capital is defined as any money used in the financing of businesses as well as its operations. This may include various methods and sources, which could be equity financing, traditional debt, or owner financing. Capital may also be obtained in form of retained earnings, grants, accrual financing contracts, gains made on investment capital, as well as forward payments on capital. It is necessary for businesses both large and small to establish capital as a way of financing growth plans. Different types of capital have an associated cost with them, such as preferred stock, common stock, and debt.

Both the WACC “Weighted Average Cost of Capital” and Marginal Cost of Capital (MCC) measure cost of capital. The “Weighted Marginal Capital Cost” (WMCC) is termed as the cost incurred in raising an additional amount of each of the various types of capital (sum of weighted marginal cost of every one of the types of capital). WMCC can also be defined from the perspective of WACC with respect to the capital costs per unit of production, whose application is in relation to the following dollar with regard to the total of the new financing. That is cost of an additional unit of capital that is raised.

Variation in the marginal costs of capital are in accordance with the type of capital used (that is subordinated or unsecured debts will have higher marginal cost than debts backed by a collateral). The marginal costs associated with capital go up with increase in the capital that is raised. In order to calculate the WMCC, it is necessary to calculate the break point (this is the point at which cost of one component rises). When the break points are found in the WMCC schedule, then the level of new financing at which Weighted Average Costs of Capital will increase is determined.

The Weighted Marginal Costs associated with Capital schedule, gives a graph, which is used to relate the weighted average costs of the firm for every dollar of its capital to the total amount of the new capital that is raised. The WMCC schedule represents WACC in percentage on the y-axis and dollars of new capital raised on the x-axis. The WMCC schedule shows the amount of new capital that a business can raise before it uses up its retained earnings forcing it to sell new common stock (where an increase in the MCC schedule occurs). It reflects the WACC for every level of sum (total) of new financing within a business organization.

I believe that the Weighted Marginal Costs of Capital schedules are always accurate. The reason being it is an illustration of the cost of funds incurred for varying amounts of the new raised capital. The accuracy of WMCC is an important component in enabling a company through the management of asset operations management and the capital budgeting process. The accuracy of the WMCC schedule is also ascertained because it is constructed by finding all the break points. This schedule also shows any rise in cost of capital occasioned by increase in cost of preferred stock or cost of debt. The accuracy thereby is highlighted in breaks or jumps in the schedule.