11.3 Weighting the Components: Book Value or Market Value?
We have the component costs of capital, but as in our earlier example with Stan’s lawn-mowing business, we typically use different amounts of funding from different sources. So once we know the cost of each component, we must next determine the relative proportions of each component in the company’s capital structure. Here we have two options: the book value of the funds or the market value of the funds. We will examine book value first as a way to find the percentage of each component.
Book Value
The book value of a liability is its cost carried on the balance sheet. We could simply determine the weights or percentages of the various components by looking at their book values. Therefore, ...
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