Should WACC calculations be based on current or historical capital structure?

Using the current optimal capital structure for WACC (Weighted Average Cost of Capital) calculations is essential because it reflects the cost of capital that the company can realistically achieve based on its current financing strategies. The optimal capital structure is the mix of debt and equity that minimizes the company's WACC while maintaining financial stability.

This approach is critical because financial markets are dynamic and constantly evolving. A current assessment takes into account the prevailing interest rates, market conditions, and the company's current equity value, which directly influence the cost of equity and the cost of debt.

While historical capital structures provide insights into past financing decisions, they may not accurately represent the present situation or future opportunities for raising capital. Therefore, utilizing a current optimal capital structure ensures that the WACC reflects the most accurate and relevant cost of capital for decision-making, investment analysis, and valuation purposes.