The capital structure weights used in computing a company's weighted average cost of capital:
A) are based on the book values of debt and equity.
B) are based on the market values of the outstanding securities.
C) depend upon the financing obtained to fund each specific project.
D) remain constant over time unless new securities are issued or outstanding securities are redeemed.
E) are restricted to debt and common stock.

Question

Quizplus · Accepted Answer

The capital structure weights used in computing a company's weighted average cost of capital are based on the market values of the outstanding securities. This means that the weights assigned to debt and equity will be based on the current market price of the securities, not their book values. It is important to use market values since they represent the true economic value of the securities. The weights can also change over time as market values fluctuate, but they will not depend on financing obtained for specific projects or be restricted to only certain types of securities such as debt and common stock.

The Capital Structure Weights Used in Computing a Company's Weighted