Financial theory favors the method using the market values of the firm's debt and equity to compare target and actual weights.

Question

Quizplus · Accepted Answer

Financial theory suggests that the market values of a firm's debt and equity should be used to determine the target and actual weights. This is because market values reflect the current perceptions of investors about the firm's value and risk, which are crucial in determining the appropriate mix of debt and equity financing. Using book values or historical cost values would not provide an accurate picture of the firm's actual financing structure.

Financial Theory Favors the Method Using the Market Values of the Firm's