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?
- It would effectively make the firm's cost of equity equal its cost of debt.
- Because the interest tax shield is calculated using the market value of debt.
- Because market value is usually lower than book value for financially distressed firms.
- Because book value is based on historical costs and does not reflect current risk.
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