Although a firm's existing mix of financing sources may reflect its target capital structure, it is ultimately ________.
A) the internal rate of return that is relevant for evaluating the firm's future investment opportunities
B) the marginal cost of capital that is relevant for evaluating the firm's future investment opportunities
C) the risk-free rate of return that is relevant for evaluating the firm's future investment opportunities
D) the risk-free rate of return that is relevant for evaluating the firm's future financing opportunities

Question

Quizplus · Accepted Answer

The mix of financing sources of a firm may reflect its target capital structure, but the relevant factor for evaluating the firm's future investment opportunities is the marginal cost of capital. The marginal cost of capital considers the cost of each additional dollar of funding and reflects the firm's current market conditions, including the cost of debt and equity. Therefore, it is ultimately the marginal cost of capital that the firm should consider when evaluating investment opportunities, rather than simply relying on their current financing mix.

Although a Firm's Existing Mix of Financing Sources May Reflect