The weights in a firm's weighted average cost of capital should be a measure of the firm's target capital structure.

Question

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The weighted average cost of capital (WACC) is calculated using weights to reflect the proportion of each component of a company's capital structure. These weights should ideally be a measure of the firm's target capital structure, which indicates the desired mix of debt and equity financing. Using actual weights that deviate from the target capital structure may result in an inaccurate WACC calculation, which may affect important financial decisions such as investment appraisal and cost of capital assessments.

The Weights in a Firm's Weighted Average Cost of Capital