14.4 Summing Up: Calculating the Firm’s WACC
As the final step in our three-step procedure, we calculate the firm’s overall cost of capital by taking the weighted average of the firm’s financing mix that we evaluated in steps 1 and 2. When estimating the firm’s WACC, we should keep the following issues in mind.
Use Market-Based Weights
It is important that the capital structure weights used to calculate the WACC reflect the current importance of each source of financing the firm has used. Typically, this means that the weights should be based on the market values of the firm’s securities rather than their book values because market values, unlike book values, represent the relative values placed on the firm’s securities at the time of the analysis ...
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