When discussing weighing schemes for calculating the weighted average cost of capital, ________.
A) market value weights are preferred over book value weights and target weights are preferred over historical weights
B) book value weights are preferred over market value weights and target weights are preferred over historical weights
C) book value weights are preferred over market value weights and historical weights are preferred over target weights
D) market value weights are preferred over book value weights and historical weights are preferred over target weights

Question

Quizplus · Accepted Answer

Market value weights reflect the current market value of a firm's assets and liabilities, which makes them a more accurate measure of a firm's actual capital structure. Target weights are preferred over historical weights because historical weights may not reflect the firm's current capital structure goals. Book value weights may not reflect current market conditions and may not accurately reflect a firm's true capital structure, which is why they are not preferred. Therefore, A is the best choice as it correctly states that market value weights are preferred over book value weights and target weights are preferred over historical weights.

When Discussing Weighing Schemes for Calculating the Weighted Average Cost