1、A Tryout on Cost of Equity(Xi An Tourism) Choosing modelDue to the complication of other models, we decided to use the CAPM as our model dealing with the problem(although it makes the most restrictive assumptions).EquationE(R) = Rf + b (Rm- Rf) (1)We are going to discuss the three parts one by one.1

2、.A riskfree rate(Rf)We decided to choose the seven year T-bill as our riskfree rate for the following reasons:1. For an investment to be riskfree, it has to have no default risk. PRC is an AA- country, so we can assume that she has no default risk.2. The seven year T-bill is a long-term bill, which

3、maturity is similar with our case. 3. The seven year T-bills consititution is close to the portfolio of the market. So it will be more precise when using it.4. The seven year T-bill is, compared to the long term interest rate, not so sensitive to the unexpected inflation. What is more, its liquidity

4、 premium is low. 5. The trading volume is huge.But due to the data defficiency, and the giant number of people who go to the bank to deposit, we can use the one year interest rate instead. The diagram below shows the variation of the one year interest rate. Since there range is big, we use different

5、 weights to value the data of different time. The closer the rate is till now, the more weight we put. Below is the data collected and the last number is our result. 2.Compared to the regression approach, I chose the comparable corporation approach for its convinience in practice. What is more, thro

6、ugh comparing the main business field and the loan to value ratio of the 17 companies on board, I found that its constitution of main business and financial parameters are highly similar. So we can come to the conclusion that the approach will work. I chose Xi An Tourism as my case. As we can see fr

7、om its description, the company mainly focuses on the tourism and real estate. Its assets are in Xi An and North Sea, both of which are domestic markets.When we are using the comparable company approach, we should use some comparable companies data, applying the method of linear regression, to get t

8、he of the companies. Then we can add weights to the companies to get a comparable .Since we can get a well rounded data from internet, we can simply apply it to our case. Because Xi An Tourisms main professions are tourism and real estate, which weights are 62% and 38%, we adopt the of these two fie

9、lds. 1.070.62+1.070.38=1.07D/E=71.28%*62.18%+39.05%*37.82%=59.09%Tax Rate=25%In the real estate field:Unlevered Business=Comparable firms (1+ (1-t)(D/E) Comparablefirms)=1.07（1+（1-0.25）0.7128）1.6420In the tourism field:Unlevered Business=Comparable firms (1+ (1-t)(D/E) Comparable firms)=1.07（1+（1-0.

10、25）0.3905）1.3834In this way we can obtain the unlevered of Xi An tourism:Unlevered =1.642062%+1.383438%1.54373.Equity risk premium (Rm- Rf)Equation: ERP=Mature market stock risk premium+ country risk premiumThe Default spread on Country Bond approach needs the assumption that there is a default risk

11、 free entity, which is not the reality in China. The equity standard deviation approach is promising but less liquid (and very risky markets) often have low standard deviations. Using this approach, we can end up with a lower standard deviation for these markets than we would for the US. Based upon

12、the above, we chose the following approach: The third approach.Equation: Country Equity risk premium = Default spread on country bond* sCountry Equity / sCountry BondThe newest ERP for US is 8.08%. We use it as our mature market stock risk premium. China is ranked as A1 by the Moodys, which is 58 BP

13、 converted to the country default risk spread. The range of the price of the stocks in the domestic market is big, bonds volatility being high at the same time, so the result will turn out to be very high when we use the data to divide the volatility. To make up, we can adopt the average data of emerging market countries, say, 1.5.8080.58%*1.5=8.08878.