7.3 WEIGHTED AVERAGE COST OF CAPITAL
7.3.1 The Measurement
In the computation of the weighted average cost of capital, the first step is to measure the cost of different forms of capital. This has already been explained. The second step is to determine the weight to be assigned to the different costs. Various methods are adopted to determine this weight. One method is to base the weight on the existing proportions of various forms of capital in the firm’s balance sheet. The other is to base these weights on the proportions in which the current capital budget is expected to be financed. Still another method is to base the weights on the current proportions of the market value of the firm’s outstanding securities.
The last option, that is, basing ...
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