What are the limit costs of capital?
In Economics, the limit costs of capital concern the added costs associated with ensuring one additional unit of capital investment. It is usually expressed as a percentage, similar to the annual percentage or return rate. To put it simply, the limit costs of capital (MCC) are equal to the cost of financing another dollars of capital investment. Generally speaking, the more money the company tries to borrow, the higher the interest rate for these funds, the higher the capital cost. MCC should not be confused with marginal production costs, which affects the added costs of the production of another unit of the product.
businesses have three basic options for financing new capital, such as equipment or factories. These include reinvesting undivided earnings, investors using stock certificates or banks from banks and debt takeover. Most companies that want to invest in new capital will be launched by investing undivided earnings because this form of financingManemo no related costs.
After exhaustion of undivided earnings, the Company must compare the limit cost of capital with the expected return rate of this new capital investment to determine how much to borrow or how many shares it issues. If the expected return rate of loans is more money greater than MCC, the company took over the debt. If MCC is higher than the expected return rate, then the company is unlikely to accept a new debt.
To understand why capital limit costs are increasing, because companies are trying to borrow or find more investors, consider the simple law of supply and demand. The more shares holders have the company, the greater the offer of available stocks. With so many existing investors, companies will have difficulty finding an offer of suitable investors to buy their shares. If you want to attract more investors to buy this additional stock, the company will have to pay investors OššThe price, which results in a higher MCC.
It can be very easy to confuse the limit cost of capital with total costs. If you want to understand the difference, consider a company that wishes to borrow $ 100,000 in the US (USD) that invests in new equipment. The bank offers this loan for an annual percentage rate or total capital costs of 12 percent. If the company wishes to borrow $ 110,000, the bank charges 15 % interest out of another $ 10,000 to cover the added risk of a larger loan. This means that MCC is 15 percent for the next capital, while the total cost of capital is between 12 and 15 percent.