Pure Play Method

CFA Level I
#1

Does anyone know if the pure play method will be covered in the June level 1 exam? I read somewhere on this website it was only for 2009.

#2

As long as it is inside the corriculum, and part of the LOS, it could be tested.

#3

I found it in the Schweser 2013 curriculum.

#4

you better go and read it, you may be stunned.

#5

Example:

Company A has debt/equity ratio of 2.0. Company B has debt equity ratio of 1.6, Company B’s beta is 1.2.

As such, the project beta would be:

  1. Less than Company A’s beta

  2. More than Company A’s beta

  3. could be greater or less than Company A’s beta

The answer is C, but I am not sure why.

The project calculated using the pure.play method is not necessarily related in a predictable way to the beta of the firm that is performing the project" This does not make any sense to me.

#6

Whose project? Company A’s? Company B’s? Jay Company’s?

#7

Just edited the post. Should make more sense now!

#8

Is Company B the pure-play company?

In any case, we don’t know Company A’s beta, so we cannot say whether it will be higher or lower than the project’s.

Maybe Company A’s beta is -1.2.

Maybe it’s 37.6.

We don’t know.

#9

Yes, company B is the pure play company (the firm that company A will be using to compute a beta for its project)

#10

How come you cannot use Compnay B’s beta of 1.2 to solve for the unlevered beta for Company A, then relever this beta to find the levered (equity) beta for company A?

#11

You can. If that project is Company A’s only project. And if you know Company A’s and Company B’s marginal tax rates. And if you know their leverages.

Without those, you cannot.