medium · Principles of Finance
Why is it logically inconsistent to pair the current market yield of debt with the book value weight of debt in a WACC calculation?
- The market yield is always higher than the book weight, leading to a negative WACC.
- Book value weights only work when paired with the historical coupon rate.
- 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 post-tax, but book weights are pre-tax.
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