medium · Principles of Finance cost-of-capital-structure
Why is it logically inconsistent to pair the current market yield of debt with the book value weight of debt in a WACC calculation?
- Market yield and book weight are mismatched units, since a percentage rate cannot be combined with a dollar-based proportion.
- Book value weights are only valid when paired with the bond's original historical coupon rate at issuance, not its current yield.
- The current yield reflects today's risk and rate environment, whereas the book value reflects the environment at the time of issuance.
- Market yields are already stated pre-tax, whereas book-value capital weights are computed net of any applicable corporate tax shield.
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