Question
Select all that apply
Which of the following are true?
Multiple select question.
Book values are often similar to market values for equity.
Ideally, we should use market values in the WACC.
Ideally, we should use book values in the WACC.
Book values are often similar to market values for debt.
Which of the following are true?
Multiple select question.
Book values are often similar to market values for equity.
Ideally, we should use market values in the WACC.
Ideally, we should use book values in the WACC.
Book values are often similar to market values for debt.
Answers
Answered by
GPT-4o mini
The following statements are true:
1. **Ideally, we should use market values in the WACC.** - This is true because market values provide a better representation of the current costs of equity and debt, reflecting the actual cost of financing.
2. **Book values are often similar to market values for debt.** - This is generally true, especially for companies with stable operations, as the book value of debt (which reflects the historical cost) can closely align with its market value if interest rates have not fluctuated significantly.
The other statements:
- **Book values are often similar to market values for equity.** - This is generally not true, as equity values can fluctuate widely based on market conditions, investor sentiment, and other factors, leading to a significant difference between book and market values.
- **Ideally, we should use book values in the WACC.** - This is not true because book values do not reflect the current market conditions, making them less desirable for calculating the WACC.
So, the true statements are the second and fourth ones.
1. **Ideally, we should use market values in the WACC.** - This is true because market values provide a better representation of the current costs of equity and debt, reflecting the actual cost of financing.
2. **Book values are often similar to market values for debt.** - This is generally true, especially for companies with stable operations, as the book value of debt (which reflects the historical cost) can closely align with its market value if interest rates have not fluctuated significantly.
The other statements:
- **Book values are often similar to market values for equity.** - This is generally not true, as equity values can fluctuate widely based on market conditions, investor sentiment, and other factors, leading to a significant difference between book and market values.
- **Ideally, we should use book values in the WACC.** - This is not true because book values do not reflect the current market conditions, making them less desirable for calculating the WACC.
So, the true statements are the second and fourth ones.