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Hello Hewitt,

I have a question about how you define WACC in your book. In Chapter 6: The Enterprising Income Statement, pg. 76, you show that the Equity portion of the weighting is derived from the Stockholder's Equity (directly from the balance sheet).

Other sources, such as Damodaran (Investment Valuation, 2nd ed), James English (Applied Equity Analysis), Investopedia (http://www.investopedia.com/terms/w/wacc.asp, etc.), all seem to be saying it should be derived using the market value of the equity (market cap).

It's a bit unclear if you're really saying something different, because in your example Wrigley has zero debt, so the calculation's "too easy", and maybe I'm missing your point.

I'm trying to understand which perspective makes the most sense. Stockholder's Equity makes the most sense, in that it's the capital that the company is using. It has no access to the "market value" of the equity. For instance, in an equity offering, the company sells shares at say $20 per share. 1 million shares = $20 million capital they get to work with. We should use this number to determine their "cost of capital" since they have no access to the extra cash in the market value, simply because the market bid the stock up to $24 per share.

Do you agree with this reasoning? Can you offer any insight into why the "party line" seems to be calculating off of market value?

I really appreciate any clarification.

Regards,
-joe
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