Question

The WACC calculation is based on : 1) The book value of all sources of long-term...

The WACC calculation is based on :

1) The book value of all sources of long-term capital

2) The book value of debt and the market value of all other sources of capital

3) The market value of equity only.

4) The market values of all sources of long-term capital

5) The book values of debt and equity only

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Answer #1

Answer is 4) Market value of all sources of long-term capital

Weighted average cost of capital is calculated based on cost of capital X Weightage. In considering the weights market value of all sources of long term capital should be considered. Only if market value is not available book value should be considered. Market value is the value which is available in open market like bond quotes and stock exchange prices. Market value represents realistic cost of capital and hence it is widely preferred

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