Where we have both the share price and the book value, do we use market value or book value to compute WACC. Slightly confused with Schweser that is using market value and yet other questions book value?
I’m also confused. I always thought it was market value (naturally because WACC was computed from market values of debt and equity in the first place)
Until this question from Schweser 2014 mock 4 afternoon, in the question a market value was given but the answer suggests to use the book value (equity + debt)
Look at equity chapter: 31 on return concept. Market value is used to calculate the weight.
Market value.
+1
@original poster
If the schweser mock used the book values it could be that it made an assumption that at the date of financial statements, the book value of the company’s capital is equal to its market value!
You are essentially calculating the portfolio cost of the firm’s capital - this is equivalent to seeing what your expected return would be if you bought ALL the debt and equity capital of the firm. And portfolio expected returns are market-weighted averages.
tl:dr – market values
Market - you’re trying to work out marginal cost of capital, surely!