While calculating the weights of various components of the capital structure, one must use:
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A. B. C. D.D
WACC calculations are based on current market values, not historical cost.
When calculating the weights of various components of the capital structure, it is essential to consider the appropriate values to ensure accuracy. The weights represent the proportion of each component within the total capital structure. The options provided in the question are:
A. Minimum of book or market values. B. Book values. C. Liquidation values. D. Market values.
The correct answer in this case is D. Market values.
Market values represent the current market prices of the securities or assets being considered. When calculating the weights of components in the capital structure, it is crucial to use market values because they reflect the true economic value of the components at the present time.
Using book values (Option B) is not appropriate for determining weights in the capital structure calculation because book values are historical values that may not accurately reflect the current market conditions. Book values are based on the original cost of the asset or liability and are adjusted over time for depreciation, amortization, and other accounting adjustments. They do not necessarily reflect the current market sentiment or the actual value of the component.
Liquidation values (Option C) represent the value of an asset or liability in a forced sale scenario where the company is liquidated. While liquidation values can be relevant in certain situations, they do not reflect the ongoing operations of a company and are not typically used in calculating capital structure weights.
The minimum of book or market values (Option A) does not accurately capture the economic reality of the capital structure. Using the minimum of the two values may not provide a realistic representation of the component's true market value.
In summary, when calculating the weights of various components in the capital structure, it is most appropriate to use market values (Option D) because they reflect the current market prices and provide a more accurate representation of the economic value of the components.