Computation of Weights or Proportions
In computation of the weights or proportions of different capital components, the following values might be used like as:
- Market values
- Replacement values
- Book values
- Intrinsic values
Market Value - This includes determining the weights or proportions using the recent market values of the various capital components. The problems along with the use of market values are as:
The market value of each security remains on changing on daily basis therefore market values can be computed simply at one point in time.
The market value of each security may be incorrect because of cases of over or under valuation in the market.
Book values - This involves the utilization of the par value of capital as shown in the balance sheet. The main problem with book values is such they are historical/past values showing the value of a security when in the market for the first time it was originally sold.
Replacement values - This contains determining the weights or proportions on the origin of amount such can be paid to replace the existing assets. The problem along with replacement values is such can assets never be replaced at ago and replacement values may not be determined objectively.
Intrinsic values - In this case the weights are determine on the basis of the real/intrinsic value of a given security. Intrinsic values may not be accurate since they are computed using historical/past information and are generally estimates.