l1-12 What effect would inflation have on a company' s cost of capital?(Hint: Think about how inflation influences interest rates, stock prices, corporate profits, and growth Inflation can only have a negative impact on a firm s cost of capital-forcing it to go up. This is true because inflation tends to increase interest rates and lower stock prices, thus raising the cost of debt and equity directly and the cost of preferred stock ind irectly 11-13 What is the concept of marginal cost of capital? The marginal cost of capital is the cost of incremental funds. After a firm reaches a given level of financing, capital costs will go up because the firm must tap more expensive sources. For example, new common stock may be needed to replace retained earnings as a source of equity capital Copyright C2005 by The McGra-Hill Companies, Inc.Copyright © 2005 by The McGraw-Hill Companies, Inc. S-381 11-12. What effect would inflation have on a company's cost of capital? (Hint: Think about how inflation influences interest rates, stock prices, corporate profits, and growth.) Inflation can only have a negative impact on a firm's cost of capital-forcing it to go up. This is true because inflation tends to increase interest rates and lower stock prices, thus raising the cost of debt and equity directly and the cost of preferred stock indirectly. 11-13. What is the concept of marginal cost of capital? The marginal cost of capital is the cost of incremental funds. After a firm reaches a given level of financing, capital costs will go up because the firm must tap more expensive sources. For example, new common stock may be needed to replace retained earnings as a source of equity capital