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#cfa-level-1 #corporate-finance #reading-36-cost-of-capital

Someone outside the company, however, such as an analyst, typically does not know the target capital structure and must estimate it using one of several approaches:

  1. Assume the company’s current capital structure, at market value weights for the components, represents the company’s target capital structure.

  2. Examine trends in the company’s capital structure or statements by management regarding capital structure policy to infer the target capital structure.

  3. Use averages of comparable companies’ capital structures as the target capital structure.

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2.2. Weights of the Weighted Average
we should use this target capital structure. The target capital structure is the capital structure that a company is striving to obtain. If we know the company’s target capital structure, then, of course, we should use this in our analysis. <span>Someone outside the company, however, such as an analyst, typically does not know the target capital structure and must estimate it using one of several approaches: Assume the company’s current capital structure, at market value weights for the components, represents the company’s target capital structure. Examine trends in the company’s capital structure or statements by management regarding capital structure policy to infer the target capital structure. Use averages of comparable companies’ capital structures as the target capital structure. In the absence of knowledge of a company’s target capital structure, we may take Method 1 as the baseline. Note that in applying Method 3, we use an unweighted, ari


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