CFA Level I · CFA Level I Exam · Capital Structure
A company's weighted average cost of capital (WACC) is most likely calculated using which of the following weights?
WACC is most appropriately computed using target market-value weights of debt and equity. These reflect the capital mix the firm expects to maintain and current investor required returns, whereas book or historical issue values reflect past accounting records rather than current economic costs.
- ABook values of each capital component
- BTarget market-value weights of each capital componentCorrect
- CHistorical issue-price weights of each capital component
Explanation
WACC should reflect the financing mix the firm intends to use and the current opportunity cost of each source. Target or market-value weights capture this. Book and historical weights reflect past accounting records and not current required returns.
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