Advanced English Dialogue for Business – Incremental cost of capital

Listen to a Business English Dialogue About Incremental cost of capital

Chloe: Hey Riley, do you know what the incremental cost of capital is?

Riley: Hi Chloe! Yes, the incremental cost of capital refers to the cost a company incurs when it raises additional funds to finance new projects or investments.

Chloe: That makes sense, Riley. It’s important for companies to calculate the incremental cost of capital accurately to ensure they make informed decisions about which projects to pursue.

Riley: Absolutely, Chloe. By understanding the incremental cost of capital, companies can determine the most efficient way to fund new investments while maximizing shareholder value.

Chloe: Right, Riley. So, how does a company calculate the incremental cost of capital?

Riley: Well, Chloe, the incremental cost of capital is typically calculated by considering the cost of each specific source of capital, such as equity and debt, and then weighting these costs based on the company’s target capital structure.

Chloe: I see, Riley. So, if a company decides to raise additional funds through issuing new shares of stock, it would consider the cost of equity capital in its calculation?

Riley: Exactly, Chloe. And if the company decides to borrow money instead, it would take into account the cost of debt capital. The incremental cost of capital reflects the blended cost of all sources of funding for new projects.

Chloe: Got it, Riley. So, companies aim to invest in projects where the expected return exceeds the incremental cost of capital to ensure they generate positive returns for shareholders.

Riley: That’s correct, Chloe. Projects that offer returns higher than their incremental cost of capital are typically considered value-creating and can help drive the company’s growth and profitability.

Chloe: Makes sense, Riley. By carefully assessing the incremental cost of capital, companies can make strategic decisions that align with their long-term financial goals and objectives.

Riley: Absolutely, Chloe. It’s a crucial concept in corporate finance that helps companies allocate capital efficiently and maximize their overall financial performance.

Chloe: Thanks for explaining, Riley. Understanding the incremental cost of capital is essential for anyone involved in financial decision-making within a company.

Riley: You’re welcome, Chloe. It’s definitely an important concept to grasp, as it has significant implications for a company’s success and competitiveness in the market.