Suppose that an analyst incorrectly calculates WACCs using book values of debt and equity instead of market values.The resulting WACC estimates will generally be too high.
Book value of equity is generally lower than market value, while the book value of debt is generally nearer to the market value.Using book values will therefore underweight the cost of equity.The resulting WACC estimates will generally be too low.

Question

Quizplus · Accepted Answer

The statement is incorrect. Using book values of debt and equity instead of market values will generally result in WACC estimates that are too low, as the cost of equity is underweighted.

Suppose That an Analyst Incorrectly Calculates WACCs Using Book Values