Explain the advantages of using market value weights over book value weights in computing the weighted average cost of capital.

      

Explain the advantages of using market value weights over book value weights in computing the weighted average cost of capital.

  

Answers


Kavungya
i) Investments are rated by investors using their returns which are ascertained using the market values of such investment.
ii) When investors acquire investment they pay market prices of such investment and will always compare the viability of their investment using market prices.
iii) Historical book values may not represent the true valuation of capital employed as shown in the balance sheet.
iv) Use of market value weights is more accurate especially for new issues of shares and debentures.
v) The assets used by capital providers as security are valued at market price for collateral purposes.
Kavungya answered the question on April 13, 2022 at 11:00


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