The weighted average cost of capital (WACC) is a financial metric that calculates the overall cost of financing a company's operations. It considers the cost of each type of financing, including debt and equity, and is often used to evaluate investment opportunities and make financial decisions. There are two methods to calculate WACC: target weights and historical weights.

The logic underlying the use of target weights is to use the company's current capital structure to determine the weights of debt and equity. The target weights represent the proportion of each type of financing the company wants to have in the future based on its current strategy and financial goals. This approach assumes that the company will maintain its current capital structure so that the target weights remain constant.

On the other hand, the use of historical weights is based on the company's actual capital structure over a period of time. The historical weights are calculated by taking the average of the company's capital structure over a certain period, usually the past year. This approach assumes that the company's past capital structure accurately reflects its future capital structure.

The preferred weighting scheme depends on the company's situation and goals. In general, target weights are preferred because they reflect the company's current strategy and financial goals. It also provides a more accurate representation of the company's future financing needs. However, using historical weights may be more appropriate if the company has a stable capital structure over time.

There are several reasons why target weights are preferred:

1. Target weights are forward-looking and reflect the company's current capital structure, which may change over time due to market conditions, business expansion, or financial goals.
2. Target weights provide a more accurate estimate of the cost of capital, as they reflect the company's current financing needs and expectations.
3. Target weights align the company's financing decisions with its overall strategy and goals.

In conclusion, the use of target weights is generally preferred over the use of historical weights to calculate the weighted average cost of capital. However, the choice of weighting scheme depends on the company's situation and goals. Ultimately, the most critical factor is to use a weighting scheme that accurately reflects the company's current capital structure and financial goals.

Hargrave, M. (2022, August 8).Weighted average cost of capital (WACC) explained with formula and example. Investopedia. Retrieved March 25, 2023, from https://www.investopedia.com/terms/w/wacc.asp#:~:text=Weighted%20average%20cost%20of%20capital%20(WACC)%20represents%20a%20firm's%20average,pay%20to%20finance%20its%20assets.

Zutter, C. J., & Smart, S. B. (2019). Principles of managerial financeplus MyLab finance with Pearson eText - Access card package(15th ed.). New York, NY: Pearson. ISBN-13: 9780134830131

REPLYAZ

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

Please Justify in 250 words note. The note should have intext citations. For example, anything with numbers or quotes. The intent citation just needs to be the author's last name and year it was published. Please also include REFERENCES. Thanks.

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

Please Justify in 250 words note. The note should have intext citations. For example, anything with numbers or quotes. The intent citation just needs to be the author's last name and year it was published. Please also include REFERENCES. Thanks.