Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

When calculating the weighted average cost of capital (WACC), the weights are based on:

the book value of each component of capital

the historical cost of each component of capital

the market value of each component of capital

the par value of each component of capital

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Verified step by step guidance

Understand the concept of Weighted Average Cost of Capital (WACC): WACC represents the average rate of return a company is expected to pay its investors (debt holders and equity holders) for using their capital. It is calculated using the weights of each component of capital and their respective costs.

Recognize the importance of market value: The weights in WACC are based on the market value of each component of capital (equity, debt, etc.), not the book value, historical cost, or par value. This is because market value reflects the current valuation of the company's capital in the financial markets.

Identify the formula for WACC: The general formula for WACC is: \( \text{WACC} = \frac{E}{V} \cdot \text{Re} + \frac{D}{V} \cdot \text{Rd} \cdot (1 - \text{Tax Rate}) \), where \( E \) is the market value of equity, \( D \) is the market value of debt, \( V \) is the total market value of capital (\( E + D \)), \( \text{Re} \) is the cost of equity, and \( \text{Rd} \) is the cost of debt.

Explain why market value is used: Market value provides a more accurate representation of the company's current financial standing and the cost of raising capital. It adjusts for changes in investor perception and market conditions, which are not captured by book value, historical cost, or par value.

Apply the concept: When solving problems related to WACC, always use the market value of equity and debt to determine the weights. Ensure you have the correct values for \( \text{Re} \), \( \text{Rd} \), and the tax rate to complete the calculation.