A company's historical target capital structure is 40 percent debt and 60 percent equity. The company expects to issue more equity in the upcoming year moving its capital structure to 50 percent debt and 50 percent equity for the long term. The company should use the current 40 percent debt/60 equity for its average weighted cost of capital.

Question

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The company should use the target capital structure of 50 percent debt and 50 percent equity for its weighted average cost of capital, as it reflects the expected long-term financing mix.

A Company's Historical Target Capital Structure Is 40 Percent Debt