Finance-Okay, we now have a great new product opportunity ahead of us

| January 30, 2017

Question
Okay, we now have a great new product opportunity ahead of us. We’ll need to raise $500,000 in capital to launch the product though. We want to make sure that the product will result in a favorable return to the company’s shareholders. We predict that with the $500,000 investment, it should return 11%.

What cost of capital calculation would you use to compare to the 11% in this scenario: (1) the company’s historical cost of capital, using the historical weights of the capital components (i.e., debt, preferred stock and common stock), or (2) the marginal cost of capital (i.e., the weights of the capital components we expect to require to fund the $500,000)

Does it matter which cost of capital we use? Why or why not?

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