When taxes are ignored, which of the following can be used to calculate the weighted-average cost of capital?

Question

Quizplus · Accepted Answer

When taxes are ignored, the most appropriate way to calculate weighted-average cost of capital is to use the ratio of expected operating income to market value of all securities. This is because ignoring taxes means that the after-tax cost of debt is the same as the pre-tax cost of debt, and hence, the market value of debt should be used instead of the book value. Using market value weights reflects the actual market prices and valuations of securities, and hence, provides a better estimate of the overall cost of capital.

When Taxes Are Ignored, Which of the Following Can Be