Q. Explain about Book Value Weights?
Book Value Weights: - Book value weights are calculating form the values taken from the balance sheet. The weight to be assigned to every source of finance is the book value of that source of finance divided by the book value of total sources of finance.
Benefits of Book Value Weights:
- Book values are readily obtainable from the published records pf the firm.
- Book value weights are more realistic for the reason that the firms set their capital structure targets in terms of book values rather than market values.
- Book value weights aren't affected by the fluctuations in the capital market.
- In the circumstances of those companies whose securities aren't listed only book value weights can be used.
Drawbacks of Book Value Weights:-
- The costs of different sources of finance are calculated using prevailing market prices. Hence weights must also be assigned according to market values.
- The present economic values of different sources of capital may be totally different from their book values.