# 2007 Exam 3 #24 Pure Play method

1. Using the pure-play method to determine the leveraged beta for CEI’s fiberglass division, the leveraged beta and WACC for the fiberglass division are closest to: Adjusted Beta Fiberglass division WACC A .95 8.36% B 1.25 13.86% C .86 7.82% D 1.4 10.82 I have trouble understanding how to get the adjusted beta in this situation. The competitor’s data is Equity, 300 million, Debt 150 million, tax, 40%, levered beta 1.3. Company’s own data is 600 million, 400 million, 40% and .95. Any help is greatly appreciated.

unlever competitor’s beta: beta new = beta * 1/(1+D/E) = 1.3 * 1/(1+150/300) = 0.8667 now relever with company’s debt and equity: 0.8667 * (1+400/600) = 1.44 Now calculate WACC based on this Beta. (All the relevant data is not present above). looks like D is the answer.

Thank you. Yes, I didn’t present all data given that I mainly don’t understand the beta part of the question.

Is that called Pure Play method?! I completely understood what CPK did, I just didn’t know it was called PURE PLAY. Doesn’t schweser simply called it delevering the beta?

well, from my understanding, pure play is simply taking a comparable, unlever the beta before levering it to analyzed company’s beta. I just can’t find the equation or understand the concept in the calculation.

it is there very much in both schweser and the text book in the SS10 - chapter on return concepts which is new this year.

Pure play method was from level 1