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#cfa-level-1 #corporate-finance #reading-36-cost-of-capital
The relation between the MCC and the IOS provides a broad picture of the basic decision-making problem of a company. However, we are often interested in valuing an individual project or even a portion of a company, such as a division or product line. In these applications, we are interested in the cost of capital for the project, product, or division as opposed to the cost of capital for the company overall.
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2.3. Applying the Cost of Capital to Capital Budgeting and Security Valuation
marginal cost of capital is equal to the marginal return from investing. In other words, the optimal capital budget occurs when the marginal cost of capital intersects with the investment opportunity schedule as seen in Figure 1. <span>The relation between the MCC and the IOS provides a broad picture of the basic decision-making problem of a company. However, we are often interested in valuing an individual project or even a portion of a company, such as a division or product line. In these applications, we are interested in the cost of capital for the project, product, or division as opposed to the cost of capital for the company overall. The cost of capital in these applications should reflect the riskiness of the future cash flows of the project, product, or division. For an average-risk project, the opportunity cost o


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