Which of the following is included in the calculation of weighted average cost of capital (WACC)?

The calculation of the weighted average cost of capital (WACC) incorporates the market values of both equity and debt because it provides the most accurate reflection of the current cost of capital. Market values represent what investors are willing to pay for the company's equity and debt in the open market. This approach ensures that the WACC takes into account the latest conditions affecting the cost of raising funds, as it considers not only the nominal values but also the risk perception surrounding the company's capital structure by the market.

Using market values allows for a more precise weighting of equity and debt in the WACC formula. This assessment is critical for financial analysis and investment decisions, where stakeholders expect to understand the true cost of financing the company’s operations. This computation supports valuing projects or acquisitions, conducting capital budgeting, and making strategic investment decisions that rely on the company's cost of capital.

In contrast, focusing exclusively on equity costs or debt costs limits the analyzation to one dimension of the capital structure, leading to an incomplete picture. Relying on book values may also misrepresent the current financial landscape, as book values often reflect historical costs rather than current market conditions.