medium · Principles of Finance cost-of-capital-structure
In the WACC formula, why must the weights of debt and equity be based on market values rather than book values?
- The tax shield is only calculated based on market values of debt.
- Market values are more stable and easier to calculate than book values.
- Market values reflect the current cost the firm would incur to raise new capital.
- Book values are always higher than market values, leading to a conservative WACC.
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