In computation of the weighted average cost of capital, weights are assigned as per :
Proportion of different sources of finance
Option 2 — Proportion of different sources of finance is correct.
The Weighted Average Cost of Capital (WACC) blends the individual costs of each source of long-term finance into a single overall cost. The “weights” in \(WACC = w_e k_e + w_p k_p + w_d k_d\) are the proportions that each source — equity, preference and debt — contributes to the firm’s total capital. So the weighting scheme is based on the relative share of the different sources of finance in the capital structure.
These weights may be measured using book values or market values, but in every case they reflect the financing-side mix, not the asset side.
Why the other options are wrong:
| Option | Reason it fails |
|---|---|
| 1 — Fixed vs current assets | An asset-mix idea; WACC weights come from the financing side. |
| 3 — Long vs short-term debt | Covers only debt, ignoring equity and preference sources. |
| 4 — Components of equity | Too narrow; leaves out debt and preference capital. |
Takeaway: WACC weights each capital source by its proportion in the firm’s overall financing mix.
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