Understanding Financing Costs and Project Selection

Your company's money gets more expensive the more you raise. You start by using your cheapest funds,

like your own profits. But once that cash runs out, you have to find more money,

like by issuing new stock, which is way more expensive. That exact moment

your financing cost jumps is called a "breakpoint." Now, imagine you have

a list of projects, ranked from highest to lowest return. You should only say "yes" to projects

as long as their return is higher than your cost of capital. Once a project's

expected return dips below that rising cost, you stop. That’s your optimal

budget.