1) Why is the MCC important? What is it used for?

2) If debt is the cheapest cost of financing, then issuing more debt should automatically lower the cost of capital. True or false? Explain.

The Marginal Cost of Capital (MCC), which is sometimes called the Opportunity Cost of Capital (OCC) or Weighted Average Cost of Capital (WACC), tells us how much we are paying for our financing. This will help us determine the required return for our investment projects. Specifically, under two basic assumptions (discussed below), the MCC will be the required return that we use when performing capital budgeting analysis.

debt is actually the cheaper source of finance because the firm gets an income tax benefit on the interest component that is paid to the lender & Limited obligation to lenders. Taking on debt can be beneficial till a certain point. But when the company becomes over-leveraged, the cost of raising additional debt becomes more and more expensive. This is because the earlier lenders would have laid the first claim on the company's assets. The subsequent lenders will thus charge more interest as the lending becomes riskier. Credit ratings also deteriorate as more and more debt capital is raised.