Incremental Cost Of Capital

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
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    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 cost of equity and cost of capital?

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  4. How do you calculate the proper weights of different costs of capital?

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  5. How does a company choose between debt and equity in its capital structure?

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