Incremental Cost Of Capital

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Cost Of Capital

    The required return necessary to make a capital budgeting project, ...
  2. Replacement Chain Method

    A capital budgeting decision model that is used to compare two ...
  3. Composite Cost Of Capital

    A company's cost to borrow money given the proportional amounts ...
  4. Cost Of Equity

    In financial theory, the return that stockholders require for ...
  5. Capital Budgeting

    The process in which a business determines whether projects such ...
  6. Weighted Average Cost Of Capital ...

    A calculation of a firm's cost of capital in which each category ...
RELATED FAQS
  1. What are some of the limitations and drawbacks of using a payback period for analysis?

    Limitations, or disadvantages, of using the payback period method in capital budgeting include the fact that it fails to ... Read Full Answer >>
  2. Is a company's paid in capital affected by the trading of its shares in the secondary ...

    The amount of paid-in capital a company has is not affected by the trading of its shares on the secondary market. Paid-in ... Read Full Answer >>
  3. What is the difference between capital and operating expenses?

    A capital expense is used to purchase or invest in a long-term asset, while an operating expense is any short-term expense ... Read Full Answer >>
  4. What is the benefit of the Modified Internal Rate Of Return (MIRR)?

    The modified internal rate of return (MIRR) is a financing metric used in business capital budgeting. Its primary benefit ... Read Full Answer >>
  5. When should a business avoid debt financing?

    It is easy to conceptualize when a business should avoid debt financing, such as whenever debt results in excessive future ... Read Full Answer >>
  6. Why is the Modified Internal Rate Of Return (MIRR) preferable to the regular internal ...

    Even though the internal rate of return metric is popular among business managers, it tends to overstate the profitability ... Read Full Answer >>
Related Articles
  1. Investing Basics

    How And Why Do Companies Pay Dividends?

    If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments ...
  2. Investing Basics

    Introduction To Multi-Discipline Accounts

    You get multiple managers, affordable diversification, customization and consolidated reporting all under one roof.
  3. Markets

    Intangible Assets Provide Real Value To Stocks

    Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value.
  4. Fundamental Analysis

    Taking Stock Of Discounted Cash Flow

    Learn how and why investors are using cash flow-based analysis to make judgments about company performance.
  5. Economics

    How to Do a Cost-Benefit Analysis

    The benefits of a given situation or business-related action are summed and then the costs associated with taking that action are subtracted.
  6. Economics

    Modified Internal Rate of Return (MIRR)

    Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation.
  7. Fundamental Analysis

    Understanding the Capital Adequacy Ratio

    The capital adequacy ratio (CAR) is an international standard that measures a bank’s risk of insolvency from excessive losses. Currently, the minimum acceptable ratio is 8%. Maintaining an acceptable ...
  8. Investing

    Additional Paid-In Capital

    Additional paid-in capital is an account in the equity section of a balance sheet. It represents the additional amount paid for the company’s shares over the par value of the shares. Additional ...
  9. Fundamental Analysis

    Capital Budgeting

    Capital budgeting is a planning process used by companies to evaluate which large projects to invest in, and how to finance them. It is sometimes called “investment appraisal.”
  10. Investing

    Return On Capital Employed - ROCE

    Return on Capital Employed (ROCE) is a financial ratio that measures company's ability to earn a return on all of the capital it employs.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!