Which component is more likely to be biased if book values are used in the calculation of WACC rather than market values?

Question

Quizplus · Accepted Answer

Common stock is more likely to be biased if book values are used in the calculation of WACC, as book values do not reflect the current market value of the company's equity. Market values are more accurate in determining the cost of equity, as they represent the current price at which a company's stock is trading in the market. Debt and preferred stock also have market values that can be used in the WACC calculation. Therefore, using book values for debt and preferred stock may have a minimal effect on the accuracy of the WACC, unlike common stock.

Which Component Is More Likely to Be Biased If Book