Pure Play method to derive project Beta

bhuyanpk
Good Student
Posts: 14
Joined: Sat Aug 08, 2015 12:12 pm

Pure Play method to derive project Beta

Postby bhuyanpk » Wed Aug 26, 2015 11:57 am

Can anyone help me understand what is D/E in problems to arrive for Equity beta and project beta.How can i use D/E for calculation.This was not covered in classroom

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Pure Play method to derive project Beta

Postby edupristine » Fri Aug 28, 2015 5:35 am

When a company is new in the industry, it has to calculate its beta. Pure play method is used by them to calculate beta. New company will use the beta of their peer group companies whose operations are similar to their Business operations. Now, they will remove the D/E from the beta of the other company (unlevered) and replace it with the D/E of their own company (re-levered). From that beta cost of equity is calculated. D/E is used to un-lever and re-lever the beta.


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