Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Describe the pure play and the accounting beta methods for
estimating divisional betas.
Expert Solution
Step 1
Pure Play method :
Under the pure play method, the company evaluates its cost of capital by evaluating the betas of comparable companies, i.e., the companies that are in the same field of business as them and have a single product line. The company or companies that are chosen have to be publicly traded. The company is first unlevered and then relevered in order to find the beta. This method is mainly useful to find divisional betas.
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