[amp_mcq option1=”rise in marginal cost of capital” option2=”fall in marginal cost of capital” option3=”rise in transaction cost of capital” option4=”rise in transaction cost of capital” correct=”option1″]<\/p>\n
The correct answer is A. rise in marginal cost of capital.<\/p>\n
The marginal cost of capital is the additional cost of raising an additional unit of capital. It is the sum of the cost of debt and the cost of equity, weighted by the proportions of debt and equity in the firm’s capital structure.<\/p>\n
When a firm undertakes a large expansion program, it is likely to increase its riskiness. This is because the firm is now exposed to more potential losses. As a result, the cost of debt will increase, as lenders will demand a higher risk premium. The cost of equity will also increase, as investors will demand a higher return for taking on more risk.<\/p>\n
The increase in the cost of debt and equity will cause the marginal cost of capital to rise. This means that it will be more expensive for the firm to raise additional capital. As a result, the firm may have to scale back its expansion plans.<\/p>\n
Option B is incorrect because the marginal cost of capital is the additional cost of raising an additional unit of capital, not the total cost of capital.<\/p>\n
Option C is incorrect because the transaction cost of capital is the cost of issuing and trading securities, not the cost of raising capital.<\/p>\n
Option D is incorrect because the marginal cost of capital is not the same as the average cost of capital.<\/p>\n","protected":false},"excerpt":{"rendered":"
[amp_mcq option1=”rise in marginal cost of capital” option2=”fall in marginal cost of capital” option3=”rise in transaction cost of capital” option4=”rise in transaction cost of capital” correct=”option1″]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[945],"tags":[],"class_list":["post-53012","post","type-post","status-publish","format-standard","hentry","category-financial-management","no-featured-image-padding"],"yoast_head":"\n