what is incremental cost of capital 
incremental cost of capital is a capital budgeting term that refers to the average cost a company incurs to issue one additional unit of debt or equity the incremental cost of capital varies according to how many additional units of debt or equity a company wishes to issue being able to accurately calculate cost of capital and the incremental effects of issuing more equity or debt can help businesses reduce their overall financing costs understanding incremental cost of capitalthe cost of capital refers to the cost of funds a company needs to finance its operations a company s cost of capital depends on the mode of financing used it refers to the cost of equity if the business is financed via equity or to the cost of debt if it is financed via debt issuance companies often use a combination of debt and equity issuance to finance their operations as such the overall cost of capital is derived from a weighted average of all capital sources widely known as the weighted average cost of capital wacc as the cost of capital represents a hurdle rate that a company must overcome before it can generate value it is extensively used in the capital budgeting process to determine whether the company should proceed with a project via debt or equity financing the incremental aspect of incremental cost of capital refers to how a company s balance sheet is effected by issuing additional equity and debt with each new issuance of debt a company may see its borrowing costs increase as seen it the coupon it has to pay investors to buy its debt the coupon is a reflection of a company s creditworthiness or risk as well as market conditions incremental cost of capital is the weighted average cost of new debt and equity issuances during a financial reporting period 