Why do we use market-value weights instead of book-value weights?
A)Because firms often "window-dress" their financial statements.
B)Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been.
C)Because it is required in the Sarbanes-Oxley regulations.
D)None of these answers is correct.

Question

Quizplus · Accepted Answer

Market-value weights are used because they reflect the current market situation and the costs the firm currently faces. Book-value weights, on the other hand, are based on historical costs and do not reflect current market conditions. Therefore, market-value weights provide a more accurate representation of a firm's current financing costs. The other options listed are not correct.

Why Do We Use Market-Value Weights Instead of Book-Value Weights