Question

For purposes of computing the WACC, if the book value of equity exceeds the market value of equity, then: the market value of equity should be used. the book value of equity should be used. the market value of equity less retained earnings should be used. the book value of equity less retained earnings should be used.

Answer 1

For purposes of computing the WACC, if the book value of equity exceeds the market value of equity, then the book value of equity less retained earnings should be used.

Step-by-step explanation:

Weighted Average Cost of Capital (WACC) is the average rate a company expects to pay to finance its assets.

It is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted

WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight, and then adding the products together to determine the value.

Answer 2

The market value of equity should be used.

Step-by-step explanation:

Their are only two methods which are book value method or market value method. The market value method is preferred because the reason is that the market value gives the more accurate numerical value that the securities of the company will give which is the required rate of return to its investors. However historic cost data is not useful because the value of stock and bonds keeps changing every second in the stock exchange and their is the risk that the WACC calculated is inaccurate which implies that the project appraised is also incorrect.

So the best way to calculate the weighted cost of capital is that we should use the fair value of the securities.