When computing a firm's cost of capital, book values should be used because they are more objective.

Question

Quizplus · Accepted Answer

Book values may not reflect the actual market value of the firm's assets and may not be a good indication of the firm's future earnings potential. Therefore, market values should be used instead of book values in computing a firm's cost of capital. Market values are subjective but provide a more accurate representation of the firm's current value in the market.

When Computing a Firm's Cost of Capital, Book Values Should