Should WACC weights use target or current capital structure, and market or book values — and why?

Use market values, not book, and a target (long-run) capital structure, not necessarily today's. Market values because WACC reflects the opportunity cost of capital to investors — equity is worth its market cap, not its accounting book; using book equity (often far below market) badly distorts the weights. Target structure because the DCF values the business over its life, so the weights should reflect the capital structure you expect to be sustained, not a temporary point (a company mid-deleveraging or with abnormally high cash shouldn't lock in that transient mix). For a stable mature firm, current market-value weights are usually a fine proxy for the target. The subtlety: if the structure is genuinely changing over time, a single WACC is inconsistent and you'd use APV or time-varying WACC. There's also mild circularity — equity market value depends on the value you're solving for — handled by iteration or using observed market caps. The principle: market-value weights at a sustainable target structure.