Why Do We Use Market-Value Weights Instead of Book-Value Weights

question 107

Multiple Choice

Why do we use market-value weights instead of book-value weights?

• A)Because firms often "window-dress" their financial statements.
• B)Because we are interested in determining what the cost of financing the firm's assets would be given today's market situation and the component costs the firm currently faces, not what the historical prices would have been.
• C)Because it is required in the Sarbanes-Oxley regulations.
• D)None of these answers are correct.

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Definitions:

Excise Tax

A targeted tax imposed on the sale of specific goods and services, such as alcohol, tobacco, and fuel.

Equilibrium Price

The price at which the quantity of a good or service demanded equals the quantity supplied, leading to market stability.

Progressivity

A characteristic of a tax system in which the tax rate increases as the taxable amount increases, placing a larger burden on high-income earners.

Federal Payroll Tax

Taxes imposed by the federal government on the wages of employees, which fund social security and Medicare programs.