The proportions of debt and equity used to determine the weighted average cost of capital for a firm is based on the market value of debt and equity outstanding.

Question

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The weighted average cost of capital (WACC) is calculated using the proportions of debt and equity in the capital structure. These proportions are based on the market value of debt and equity outstanding, not their book value. This is because the market value better reflects the current value of the firm's capital structure and the risks associated with each component of the capital.

The Proportions of Debt and Equity Used to Determine the Weighted