When Estimating a Weighted Average Cost of Capital,a Firm Can

question 58

Essay

When estimating a weighted average cost of capital,a firm can use either book values or market values for estimating the value of the component sources of capital.Where would you find book values,and what value do they represent? How would you calculate market values? In general,would you prefer to use market or book values for estimating the WACC? Under what circumstances would you use book values?

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Definitions:

Price Elasticity

The measure of how much the quantity demanded of a good responds to a change in the price of that good.

Demand Curve

A diagram that illustrates the connection between a product's cost and the amount of it consumers want to buy at various prices.

Substitution Effect

The change in the consumption pattern of goods or services due to a change in their relative prices, causing consumers to replace more expensive items with cheaper alternatives.

Income Effect

The change in the quantity demanded of a good resulting from a change in consumer income, holding prices constant.