Based On The GMP Capital BAMP Project Cost Estimation

The cost of capital acts as cutting line of yields of a company in project investmentdecision, and it directly affects whether or not investing, so it is very significant and difficultfor project investment. EH company investors encountered the problem how to determine theproject cost of capital in investment decisions for the upcoming GMP project. But the existingmethods of EH company fails to estimate the cost of capital correctly, due tomisunderstanding of the concept of the cost of capital which results in the misuse ofinvestment method.This paper firstly analyzes the GMP project and influence factors of the cost of capital ofGMP project,,and illustrates the rationality of the application of BAPM, through comparingseveral methods which measuring the project cost of capital. then induces the calculatingsteps of the cost of capital GMP using BAPM, which made the theme of this paper clear; thentwo groups of momentum are built respectively with comparable companies yield regressionby fitting the comparison, and slope of equation by fitting one set of momentum is selected asa comparable company’s equity beta; using transformation formula of equity beta andbusiness beta, the comparable company equity beta is obtained through unloading financialleverage from equity beta, the arithmetic mean of which is the GMP project beta, substitutingit to BAPM, cost of capital of GMP project can be obtained; finally analyzing the calculationresults which results in the necessity of applying BAPM.The following conclusions can be acquired from this paper: through interviews andanalysis of the EH company, we know irrational behavior exists in the using process of thecost of capital, which made by the policymakers in daily investment decisions, and whichleads to the inaccurately calculation of the cost of capital and influents the outcome of theproject decisions; due to the not effective market, comparing with BAPM, CAPM is notsuitable for measuring the cost of capital of the GMP project,; when selecting the two groupsmomentum, the one which fits the comparable company more well is preferent; the value ofGMP project beta is0.5213, and the cost of capital of GMP project is8.08%. The conclusionsof his paper mainly provide a reference for EH company GMP project decisions, as well asfor the other companies which investing proprietary Chinese medicine industry.