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The target weights refer to the proportion in which the firm plans to raise the funds from various sources in the long run. In other words, the target weights system reflects the desired long term financial plans or capital structure of a firm. In the target weights system, the firm in the first instance, decides about the shape f the optimal capital structure and proportion of different sources in the optimal capital structure. This, then, will be achieved by the firm in the long run. At a particular point of time, the actual capital structure may not be the optimal capital structure, but in the long run, the firm intends to shape it as an optimal capital structure.

If a firm already has an optimal capital structure, then its historical weights will be equal to the targets weights. Unless a firm’s existing capital structure significantly differs from the optimal capital structure, the WACC using historical weights is not expected to be different from the WACC using target weights. The use of the target weights is the best option as this system incorporates the long term perspective of the firm.   

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