medium · Principles of Finance cost-of-capital-structure
Why is the market value of equity used instead of the book value of equity in the D/E ratio for beta re-levering?
- To make the cost of equity equal to the cost of debt.
- Because the tax shield is based on the market value of debt.
- Because market value is usually lower than book value.
- Because book value is based on historical costs and does not reflect current risk.
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