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 rather than market values. This is because the book value of common stock may not accurately reflect the current market value or the potential growth prospects of the company. Using market values would provide a more accurate reflection of the true cost of equity, which is a crucial component of WACC. Debt and preferred stock usually have fixed values, so their book values may be more accurate representations. Thus, A and B are not correct, and D is not correct either.

Which Component Is More Likely to Be Biased If Book