Hi Savio,

The orthodox answer to your question is that WACC is determined by a mix of capital sources that is determined by the board of directors of firms in conjunction with the financing function of businesses. When I was an analyst I would talk with management to ask them about their anticipated mix of funding sources over the next 1-3-5 years to be able to better estimate WACC. In this case, I would use market values because when companies access capital markets they need to pay market rates for their capital.

Note: in my article I believe it is a huge advantage to businesses to be able to fund at market rates right now. The problem is when they set their expected return assumption on a spread over WACC basis. To my thinking the expected rates of return have to be much higher than the current artificially low levels. Put another way, the problem is not WACC, the problem is expected rates of return.

Enjoy the weekend...hope it is sunny and warm up North!

Jason