In what sense is the WACC an average cost A marginal cost?

QUESTION

In what sense is the WACC an average cost A marginal cost?

d average cost of capital changes as the volume of finance increases.  As the volume of financing increases the cost of different types of financing also increases. This is because the increase of debt in the capital structure increases the financial risk of the firm which increases the cost of debt. The cost of common stock also increases with the increase in debt and is also higher than the cost of retained earnings. The weighted marginal cost of capital is the weighted average of the cost of different sources of financing associated with the new financing required to finance the investment project. Therefore when raising finance for a new investment weighted average cost of capital is the marginal cost.

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