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In calculating the weighted average cost of capital, if you had to use book values for...

In calculating the weighted average cost of capital, if you had to use book values for either debt or equity, which would you choose? Why?

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Answer #1

Please find below the solution.. let me know if you need any clarification.

WACC should be based on market weight. As market weights are more relastic to provide the details of the debt:equity mix. Book weights are based on the historic value of the asset and liabilities. Therefore it may not be very much meaningfull. Value of equity can be measured by the market price of the share multiplying by number of share. Same for the bond.

Therefore Mareket weight should be used to get better outcome.

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