The most common capital budgeting approaches use the basic constant risk-adjusted discount models. The most popular valuation approach discounts the unlevered cash flows by the after-tax weighted average cost of capital. The adjusted present value (APV) approach takes the sum of the present value of the unlevered cash flow discounted by the cost of equity of the unlevered firm and the value of the tax benefits of debt discounted by the cost of debt. Traditional approaches for calculating the after-tax weighted average cost of capital and cost of equity of the unlevered firm assume that firms maintain a constant market-value percentage of debt. However, firms typically maintain a book-value percentage of debt. Brick and Weaver (Rev Quant Finance Account 9:111–129, 1997) present an approach to estimate the cost of equity of an unlevered firm when the firm maintains a constant book-value-based leverage ratio. We demonstrate that both the Modigliani and Miller (Am Econ Rev 53:433–443, 1963) and Miles and Ezzell (J Finan Quant Anal 15:719–730, 1980) approaches may yield substantial valuation errors when firms determine debt levels based on book-value percentages. In contrast, our method makes no errors as long as managers know the marginal tax benefit of debt. If the managers do not know the marginal tax benefits of debt, our approach will still result in the smallest valuation error.