Suppose that an analyst incorrectly calculates WACCs using book values of debt and equity instead of market values. The resulting WACC estimates will generally be too high.

Question

Quizplus · Accepted Answer

Using book values instead of market values typically results in a lower WACC because book values of debt and equity are often less volatile and can be lower than market values, especially in a rising market.

Suppose That an Analyst Incorrectly Calculates WACCs Using Book Values