Please help with the given statements and question:
There are few ways to compute the weighted average cost of capital for a company: Of course one first estimates the 'cost' (in percentage terms) of the three main sources of capital: short term debt or liabilities, long term debt or liabilities and the cost of equity, and then computes the WACC using 'appropriate weights' as follows:
(1) Use the balance sheet of 'book values' of the different sources of capital as the 'weights'.
(2) Use the market value of short term debt (or liabilities), long term debt (or liabilities) and the market value of equity as 'weights'
(3) Use the "Target Capital Structure" of the company as the 'weights'.
Which of the three approaches should be adopted? Why?