Weighting System

Weighting System

Weighing system gives rise to two difference problems regarding assignment of weights, viz.(i) historical Vs. marginal weights, and (ii) book value Vs. market value weights.

• Historical Vs. Marginal Weights: If marginal capital mix differs from historical, the weighting system will also be different The critical assumption in any weighting system is that the firm will actually raise. Capital in the same proportion as specified. Everything thus depends on the package of funds employed to finance investment projects. If this is different from the historical (existing) capital structure, we will have to use marginal weights, corresponding to the proportions of financing. mix the firms intends to employ. Marginal weighted cost of capital may thus be different from the historical weighted. Average cost. However, over time. It is in this sense that we try to measure the marginal cost of capital for the package of financing employed.

• Book-Value Vs. Market-value Weights: When historical weights are used, this problem arises. As the market value of any source of funds (particular equity capital) may differ from its book value, the weighted average cost of capital will also differ according to whether book value or market value weights are employed.