Using Market Values Rather Than Book Values for Cost of Capital

question 66

Multiple Choice

Using market values rather than book values for cost of capital computations ensures 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 positive NPV projects.

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Definitions:

Expected Inflation

The rate at which prices for goods and services are anticipated to rise over a future period, as forecasted by economists or financial markets.

Relative Purchasing Power Parity

A theory in economics that suggests that changes in the exchange rates between currencies are in direct proportion to changes in the countries' price levels.

Expected Inflation

The predicted average rate at which prices of goods and services rise over time, eroding purchasing power.

Relative Purchasing Power Parity

An economic theory that suggests exchange rates between currencies adjust to negate changes in purchasing power.