For a current financing decision, which values are generally preferred for assigning weights in the weighted average cost of capital?
Correct answer: B. Market values of the financing sources
- A. Historical values of the financing sources
- B. Market values of the financing sources
- C. Nominal values of the financing sources
- D. Replacement values of the assets
Explanation
Market values reflect the current economic value of debt and equity, so they better represent the opportunity cost of finance. Book or historical values may differ substantially from current investor valuations.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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