Using Market Values Rather Than Book Values for Cost of Capital

question 21

Multiple Choice

Using market values rather than book values for cost of capital computations insures that the firm:

• A)Does not ignore the value of retained earnings
• B)Gets the full value of the debt tax shield
• C)Uses expected rates of return
• D)Will not invest in negative NPV projects

---

Definitions:

Economic Value

A measure of the benefit provided by a good or service to an economic agent.

Payments

Transfers of money, or other agreed-upon medium, from one party to another in exchange for goods, services, or to fulfill a legal obligation.

Compounded Quarterly

Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan on a quarterly basis.

Loan

A sum of money that is borrowed, usually from a financial institution or individual, which is expected to be paid back with interest.