paper addresses apparent definitional gaps and ambiguities in existing references
to the marginal aspects of the weighted average cost of capital (WACC) and
reviews its role as a benchmark in investment appraisal. A selection of typical
statements, both from the finance and economics traditions, is presented to highlight
limitations of the current state of the debate, and to reconcile modelling styles
in the area. The commonly advanced justification for the use of WACC as a criterion
on grounds of practicality only is criticised as subject to unduly restrictive
conditions, especially unchanged gearing. Alternative Marginal Factor Cost
(MFC) definitions for equity and debt are proposed, and their properties explored.
The corresponding MFC curves cross over at the minimum WACC which can then
serve as a marginal criterion under optimal gearing. Minimum WACC is also
derived from a profit maximisation model and WACC is thus shown to be
compatible with marginalism in so far as profit maximisation applies. A related
aim of the analysis presented is to inform pedagogy in the area by crossing the
boundary between economics and finance modelling.