medium · Principles of Finance

Why is the market value of equity used instead of the book value of equity in the D/E ratio for beta re-levering?

1. To make the cost of equity equal to the cost of debt.
2. Because the tax shield is based on the market value of debt.
3. Because market value is usually lower than book value.
4. Because book value is based on historical costs and does not reflect current risk.

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