Q. Estimate cost of equity using market values?
The cost of equity as well as cost of debt should always be estimated using market values.
If the approximate cash flows of an investment include estimates of price/cost changes caused by inflation the discount rate must also include expected inflation. Approximation of the discount rate which use market based estimates of the cost of equity and the cost of debt will include expected inflation and there is no require for any further adjustment. If approximate cash flows are in real terms excluding inflation, the discount rate must also be in real terms.