Principles of Managerial Finance

CHAPTER 11 The Cost of Capital 487

weighted marginal cost of capital (WMCC), which increases as levels of total

new financing increase. Figure 11.1 presents the WMCC schedule. Again, it is

clear that the WMCC is an increasing function of the amount of total new

financing raised.

The Investment Opportunities Schedule (IOS)

At any given time, a firm has certain investment opportunities available to it.

These opportunities differ with respect to the size of investment, risk, and return.^8

The firm’s investment opportunities schedule (IOS)is a ranking of investment pos-

sibilities from best (highest return) to worst (lowest return). Generally, the first

project selected will have the highest return, the next project the second highest,

and so on. The return on investments will decreaseas the firm accepts additional

projects.

EXAMPLE Column 1 of Table 11.3 shows Duchess Corporation’s current investment oppor-

tunities schedule (IOS) listing the investment possibilities from best (highest

return) to worst (lowest return). Column 2 of the table shows the initial invest-

ment required by each project. Column 3 shows the cumulative total invested

investment opportunities
schedule (IOS)
A ranking of investment possibil-
ities from best (highest return) to
worst (lowest return).

0 500 1,000 1,500

Total New Financing ($000)

9.5

10.0

10.5

11.0

11.5

Weighted Average Cost of Capital (%)

Range of total new financing WACC

$0 to $600,000

$600,000 to $1,000,000

$1,000,000 and above

9.8%

10.3

11.5

9.8%

10.3%

11.5%

WMCC

FIGURE 11.1

WMCC Schedule
Weighted marginal cost of
capital (WMCC) schedule for
Duchess Corporation

8. Because the calculated weighted average cost of capital does not apply to risk-changing investments, we assume
   that all opportunities have equal risk similar to the firm’s risk.