Incremental cost of capital

The incremental cost of capital is the weighted-average cost of new debt and equity issuances during a reporting period. When the incremental cost of capital begins to rise, it indicates that investors feel the entity has an excessively risky capital structure that is weighted too far in the direction of debt. At some point, acquiring too much debt will result in a rapid boost in the incremental cost of capital, which sends a message to management that the capital markets will require the firm to raise more equity funding. The concept is commonly used in capital budgeting decisions, where the return on an investment is compared to the incremental cost of capital to see if it makes sense to acquire more funding in order to pay for a new capital project.

Related Courses

Capital Budgeting 
Financial Analysis