First of all let us identify the basic diffrance betwwn both of them

a. the book value cost of capital

The book Value cost of capital is the overall cost of capital of the company derived using the existing cost of capital, existing proportion of its capital structure and the existing valuesin the book value

b. the market value cost of capital

market value cost of capital means the overall cost of capital but it is derived from the current prevailing market cost, target capital structure and market value of the capital

circumstances the following should be used

a. the book value cost of capitalth

-Manager generally prefer the book values so that they can calculate

• Firms in practice set their target capital structure in terms of book values.

The book value information can be easily derived from the reliable sources.

The book value debt equity ratios are analyzed by the investors to evaluate the risk of the firms practice.

The market value cost of capital

Generally the investor would demand market required rate of return on the market value of the capital and not the book value of the capital.

using the book value of equity is simply against the principle of shareholders’ wealth maximization

If we calculate the book value, then we can accept projects that the shareholders would want us to reject. If we value a company, we would get a higher market value than what the company is worth. So market value is preffered.