The capital structure weights used in computing the weighted average cost of capital:
A) are based on the book values of total debt and total equity.
B) are based on the market value of the firm's debt and equity securities.
C) are computed using the book value of the long-term debt and the book value of equity.
D) remain constant over time unless the firm issues new securities.
E) are restricted to the firm's debt and common stock.
F) None of the above.

Question

Quizplus · Accepted Answer

The capital structure weights used in computing the weighted average cost of capital are based on the market value of the firm's debt and equity securities. This is because market value reflects the true economic value of the securities and represents the amount that investors are willing to pay for them. The book value, on the other hand, simply represents the historical cost of the securities and may not reflect their current market value. Therefore, using market value weights provides a more accurate measure of the firm's cost of capital.

The Capital Structure Weights Used in Computing the Weighted Average