Question

Under which of the following circumstances is the pure play method of estimating a​ project's beta particularly​ useful?

A.

The firm is looking to expand its current business​ operations, doing essentially the same work.

B.

The firm is looking to expand its current business operations. The work will be essentially the same as current operations but there is no obvious outside provider of the same service or product.

C.

The firm is looking to expand its current business operations into a brand new area unlike any of its internal projects.

D.

The pure play method works equally effectively under each and all of these scenarios.

Answer 1

Answer:

Correct answer is:

C. The firm is looking to expand its current business operations into a brand new area unlike any of its internal projects.

Explanation:

Pure play method involves:

1. Shorting listing similar publicly traded companies

2. Deriving unlevered beta from such company's D/E ratio, beta and tax rate.

3. Deriving equity levered beta for the project specific D/E ratio and tax rate

Hence:

Pure play method of estimating project's beta is particularly​ useful when the firm is looking to expand its current business operations into a brand new area unlike any of its internal projects.

As such option c is correct.

Option a is incorrect it can use its beta for evaluation of expansion if such expansion is of same work, it is currently doing.

Option b is incorrect since pure in play method we gather data of comparable companies.

Option d is incorrect since options a and b are incorrect,