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 choices are correct.

Question

Quizplus · Accepted Answer

Market-value weights are used because they reflect the current cost of financing, which is more relevant for making decisions about future investments and financing than historical (book) values. This approach aligns with the goal of assessing the cost of capital based on current market conditions and the rates the firm would face today for raising funds.

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