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 are correct.

Question

Quizplus · Accepted Answer

Market-value weights reflect the current market situation and the component costs the firm currently faces, whereas book-value weights reflect historical costs and acquisition values. The cost of financing the firm's assets would be better determined by using market-value weights instead of book-value weights.

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