The marginal cost of capital should be less than the return on equity. If the capital costs more than the return received, the company would not have an incentive to invest.
The marginal cost of capital is greatly affected by the capital structure of the firm.
The marginal cost of capital is the cost of obtaining the next dollar of financing. It is approximately equal to the weighted average of the investors' required returns on debt and equity.
Any relationship between the company's marginal cost of capital and the required rate of return used in a particular capital budgeting analysis is specific to that capital budgeting analysis only. The required rate of return used in a particular capital budgeting analysis can be any rate that management considers appropriate for the specific capital budgeting project being analyzed. That may be the marginal cost of capital, it may be the company's weighted average cost of capital, or it could be any rate higher or lower than either of those rates. Higher or lower rates can be used to incorporate into a capital budgeting analysis an allowance for a level of risk that is judged to be higher or lower than the company's usual business risk.
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