ACCA · Question 09 · Estimating the Cost of Capital
Section A
MediScan Diagnostics is calculating its Weighted Average Cost of Capital (WACC) to appraise a new MRI facility. The finance director is debating whether to use book values or market values for the weighting of equity and debt.
According to financial management theory, which of the following statements regarding WACC weightings is correct?
Answer options:
Book values should be used because they are objective and not subject to daily stock market fluctuations.
Market values should be used because they represent the current opportunity cost of capital to the investors.
Target book values should be used if the company plans to change its capital structure in the future.
It makes no difference whether book values or market values are used, provided the calculation is mathematically consistent.
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