Economics · Financial Management
When calculating the Weighted Average Cost of Capital (WACC) for a listed entity, which theoretical justification supports the preference for market value weights over book value weights for a realistic assessment of the hurdle rate for new projects?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Market value weights ignore the impact of retained earnings and therefore provide a more conservative cost of capital.
- 2Book value weights are preferred by regulatory authorities for all statutory audits of commercial entities.
- 3Market value weights represent the current opportunity cost of investors and the actual proportions of capital at current prices.✓
- 4Market value weights are easier to calculate as they are readily available in the audited annual reports of the company.
Correct answer
Market value weights represent the current opportunity cost of investors and the actual proportions of capital at current prices.
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