Principles of Managerial Finance

486 PART 4 Long-Term Financial Decisions

Calculating the WMCC

Once the break points have been determined, the next step is to calculate the

weighted average cost of capital over the range of total new financing between

break points. First, we find the WACC for a level of total new financing between

zero and the first break point. Next, we find the WACC for a level of total new

financing between the first and second break points, and so on. By definition, for

each of the ranges of total new financing between break points, certain compo-

nent capital costs (such as debt or common equity) will increase. This will cause

the weighted average cost of capital to increase to a higher level than that over

the preceding range.

Together, these data can be used to prepare a weighted marginal cost of cap-

ital (WMCC) schedule.This is a graph that relates the firm’s weighted average

cost of capital to the level of total new financing.

EXAMPLE Table 11.2 summarizes the calculation of the WACC for Duchess Corporation

over the three ranges of total new financing created by the two break points—

$600,000 and $1,000,000. Comparing the costs in column 3 of the table for each

of the three ranges, we can see that the costs in the first range ($0 to $600,000)

are those calculated in earlier examples and used in Table 11.1. The second range

($600,000 to $1,000,000) reflects the increase in the common stock equity cost

to 14.0%. In the final range, the increase in the long-term debt cost to 8.4% is

introduced.

The weighted average costs of capital (WACC) for the three ranges are sum-

marized in the table shown at the bottom of Figure 11.1. These data describe the

TABLE 11.2 Weighted Average Cost of Capital for Ranges

of Total New Financing for Duchess Corporation

Weighted cost

Range of total Source of capital Weight Cost [(2)(3)]

new financing (1) (2) (3) (4)

$0 to $600,000 Debt .40 5.6% 2.2%

Preferred .10 10.6 1.1

Common .50 13.0 (^6) . (^5) 
Weighted average cost of capital 9

.

8

%
$600,000 to $1,000,000 Debt .40 5.6% 2.2%
Preferred .10 10.6 1.1
Common .50 14.0  (^7) . (^0) 
Weighted average cost of capital 1

0

.

3

%
$1,000,000 and above Debt .40 8.4% 3.4%
Preferred .10 10.6 1.1
Common .50 14.0  (^7) . (^0) 
Weighted average cost of capital 1

1

.

5

%
weighted marginal cost of
capital (WMCC) schedule
Graph that relates the firm’s
weighted average cost of
capital to the level of total new
financing.