Question

Select all that apply

Which of the following are true?

Multiple select question.

Ideally, we should use book values in the WACC.


Book values are often similar to market values for debt.


Ideally, we should use market values in the WACC.


Book values are often similar to market values for equity.

Answer 1

The following statements are true:

1. **Ideally, we should use market values in the WACC.**
- This is the preferred approach because market values better reflect the current cost of capital and the actual risk perceived by investors.

2. **Book values are often similar to market values for debt.**
- This is typically true because the market value of debt often does not differ significantly from its book value, especially for bonds that are not deeply discounted or premium.

The remaining statements:

- **Ideally, we should use book values in the WACC.** (This is generally not true; market values are preferred for accuracy.)
- **Book values are often similar to market values for equity.** (This is usually not true; market values for equity can vary significantly from book values.)

So the correct selections are the second and third options.