What should you use as a proxy for optimal capital structure when calculating WACC?

Using the median capital structures of peer companies as a proxy for optimal capital structure when calculating WACC is justified because it provides a relevant benchmark that reflects the competitive landscape in which a company operates. Peer companies typically operate within the same industry and face similar market conditions, growth prospects, and risk profiles. By analyzing their capital structures, one can derive an understanding of what is considered a "normal" or "optimal" mix of debt and equity within that specific context.

This approach helps to ensure that the WACC reflects the cost of capital that the market perceives as appropriate for companies with similar risk characteristics and operational profiles. Given that companies within an industry often have comparable economic conditions, using the median capital structure of peers can help to mitigate idiosyncratic factors that might skew a company's own capital structure and offer a more stable, industry-appropriate reference point.

It is essential to consider both equity and debt components in this analysis, as each portion significantly influences the overall WACC. The median of peer companies often provides a more accurate picture than a single company's historical capital structure, which might not account for recent shifts in market conditions or strategic decisions that differ considerably from typical industry practices.