Question

Which of the following are true?
a. Ideally, we should use book values in the WACC.
b. Book values are often similar to market values for equity.
c. Ideally, we should use market values in the WACC.
d. The market value of debt and equity are not reliable in case of privately owned company.

Answer 1

Answer:

c. Ideally, we should use market values in the WACC.

Explanation:

WACC - Weighted Average Cost of Capital

It refers to the cumulative cost of finance resources of the company. It is calculated by assigning the weights to each financial instrument.

This shall be based on market value because the book values only represent the issue price, but the market value calls for the price it will fetch today, and accordingly the price at which the users shall buy.

The expected return of investors holding these instruments define the cost aspect associated with these.

Thus, market values shall be used more preferably.