Suppose you are the president of a small, publicly-traded corporation. Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. In this case, the appropriate marginal cost of capital for use in capital budgeting during the current year is the after-tax cost of debt. True or False? Explain?

Question

Beasley

Social Studies

2 February, 16:43

Suppose you are the president of a small, publicly-traded corporation. Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. In this case, the appropriate marginal cost of capital for use in capital budgeting during the current year is the after-tax cost of debt. True or False? Explain?

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Gideon Benton · Answer 1

The correct answer is False.

Explanation:

Marginal cost or cost of production is the increase in the overall cost of production needed to be added to produce one additional item.

In the case given actually the marginal cost to be used in the capital budgeting for the current year will not only be the after-tax cost of debt but also the whole amount of the debt itself.