Estimating Capital Cost of Project in the Inefficient Market

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Author	Xijuan Shao, Changyue Huang, Yaxin Li
ISSN	2225-7217
On Pages	272-279
Volume No.	2
Issue No.	4
Issue Date	July 01, 2020
Publishing Date	July 01, 2020
Keywords	Inefficient market; BAPM; capital cost of project; project investment decision

Abstract

The method for estimating capital cost of project based on CAPM does not work in the inefficient market. According to frameworks that using BAPM to estimate capital cost of project, this paper detailed how to eliminate noise trader risk and un-lever financial leverage to obtain the project beta, provided the theoretical basis of choosing the yield-to-maturity on one-year book-entry treasury bonds as risk-free rate and substituting Shanghai Composite Index for market portfolio. This paper not only proposed logical steps to estimating market risk premium, but also have estimated and provided the value of risk-free rate and market risk premium, which is respectively 3.52% and 10.01%. In this paper, we provided more realistic and practical method for estimating capital cost of project in the inefficiency market, which would be helpful to improve the quality and efficiency of project investment decision

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