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 the options are correct.

Question

Quizplus · Accepted Answer

Market-value weights are used because they reflect the current market situation and the component costs the firm currently faces, which is more relevant to determining the cost of financing the firm's assets compared to the historical book values. The option A is not the primary reason for using market-value weights, although it is a potential issue with book-value weights. Option C is incorrect as Sarbanes-Oxley regulations do not stipulate the use of market-value weights. Option D is incorrect.

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