DEFINITION of 'Incremental Cost Of Capital'

A term used in capital budgeting, the incremental cost of capital refers to the average cost a company incurs to issue one additional unit of debt or equity. The incremental cost of capital varies according to how many more or fewer units of debt or equity a company wishes to issue. The calculation frequently used to determine the cost of capital is the weighted average cost of capital formula (WACC), which weights the cost of debt and equity, according to the company's capital structure.

BREAKING DOWN 'Incremental Cost Of Capital'

The term "incremental cost of capital" refers to costs associated with acquiring more debt or equity for a future project. The incremental cost of capital is usually equal to the hurdle rate, which is the required rate of return for the acceptance or rejecting of a project.

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RELATED FAQS
  1. Which is more important when estimating cost of capital - debt or equity?

    Learn about the relative costs of debt and equity and how they affect the overall cost of capital, including why debt may ... Read Answer >>
  2. How do you calculate the ratio between debt and equity in the cost of capital

    Discover how to calculate the ratio between debt and equity when making cost of capital estimations using the weighted average ... Read Answer >>
  3. What is the difference between the cost of capital and required return?

    Take a look at the primary conceptual differences between an investor's required rate of return and an issuing company's ... Read Answer >>
  4. What is the difference between cost of equity and cost of capital?

    Read about some of the differences between a company's cost of equity and its cost of capital, two measures of its required ... Read Answer >>
  5. How do you calculate the proper weights of different costs of capital?

    Understand how to calculate the weights of the difference costs of capital and how this calculation is used to determine ... Read Answer >>
  6. How does a company choose between debt and equity in its capital structure?

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