The market failure in the context of the financial crisis make the current mainstream valuation theory lack of reality and operability. Merger and acquisition in the context of little active market should consider different enterprise internal characteristics and motivation of both sides. Based on the home and abroad re- search on capital cost

capital structure

and leverage principle

the article reveals thattheessenceofenterpriseriskis volatilityoforganizationcostcausedbyvolatility of sales

and concludes that the capital cost (risk) can be decompose into operat- ing risk

financial risk

liquidity risk and derivative risk

and transform individual risk into industrial risk

moving average risk

market risk and independent risk. With Chinese practices

Leverage Pricing Model (LPM) can workout the capital cost of negative firm. Finally

LPM proves its realistic application from the empiri- cal test on Chinese industrial capital cost and the case of Geely-Volvo merger.