Why Is It Important to Use Market Values Rather Than

question 69

Essay

Why is it important to use market values rather than book values when determining the weighted-average cost of capital?

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Definitions:

Required Rate

The lowest expected gain an investor aims to receive from an investment in a specific asset, taking into account the associated risk.

Fixed Costs

Expenses that do not change with the volume of production or sales, such as rent, salaries, and insurance premiums.

Bottom-Up Approach

A strategy that starts at the very detailed level and works upwards to form a complete picture, often used in analysis or planning.

Operating Cash Flow

Operating cash flow is the cash that comes from a company's usual business activities, showing if it can produce enough positive cash flow to sustain and expand its operations.