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

question 58

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 is correct.

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Definitions:

Face Value

The nominal value or dollar value printed on a bond, stock, or other financial instrument, not necessarily its current market value.

Bond Matures

The point in time when a bond's principal amount is payable to the bondholder, and the obligation of the issuing party ends.

Current Market Value

The present financial value of an asset or company based on its trading price in the market, subject to fluctuations.

Effective Yield

This is the total yield on an investment expressed on an annual basis, taking into account the compounding of interest.