# Pureplay method project beta

anyone have any insight into this? it doesn’t come up often in schweser Qbank. i guess i was just wondering if you knew of a summary about it?

It comes up in the Elan material…is basically trying to find a beta that the company has no experience in. So they use another Companys info to derive a beta for that project. Simple formula, just do it a couple of times.

I had a friend last year say they threw in a lever/unlever question at the end of corp finance in the afternoon section…

i knew how to do these about 4 months ago. right now, I probably have little clue. Being that there is like… 40? hours until the test, I am going to spend my time learning things that are probably more important than the one question on asset / equity betas that MIGHT be on the test. (33% chance I might get it right!) really I just don’t want to memorize that formula

Do the question 5 times and you will see how simple it is…you just memorize the denominator and you have both. Lots of time left…these little things might help you get over the hump if your close.

This might be the worst way to look at it but its how I remember it. Take beta of equity and unlever it by “discounting” the leverage from the Beta. In this case leverage is measured by D/E * 1- t. Equity beta / 1 + [D/E * (1- t)], somewhat like the structure of a PV formula. Then after finding the unlevered ‘asset’ beta, you find the project beta by reapplying the leverage somewhat similar to the FV formula of x * (1+r). In this case x = Beta of asset and r = (1-t)D/e That’s just how I remember it at least, with all this material you got to do whatever it takes.

Great idea mpjufl. At this point it doesn’t matter if you know it inside-out or just barely can recall it - the point is to get it right on the exam!

I hope to god that isn’t tested. I know it will only be one mark if it is, but I will be disappointed if I see it because I just didn’t learn it. I think we will all be pleasantly surprised at how qualitative the exam actually is.

The exam is definitely more qualitative than candidates usually expect. That being said, the pure-play method is quite an important concept, and is one of the more difficult things in the corp fin section (alongside learning the cost of ST borrowing formulas, which BTW Schweser does not cover).

Beatthecfa, Do you think there’s still time to learn the ST borrowing formulas or if we should even try at this point? I have Schweser and never heard of them before. BTW, thanks for all your help! Just started following AF a few weeks ago and your posts have been extremely helpful.

It wasn’t tested last year. Worst comes to worst it’s one of 240 questions.

@ chuckrox8 the ST borrowing formula is incredibly easy. [1+ ( discount / 1 - discount )] ^ 365/#days past cutoff so if its 2/10 net 30 and u pay on day 25. Day 10 is your cutoff here. [1 + (0.02/0.98)]^365/15 - 1 = 1.634 - 1 = 0.634 So the annualized cost savings forgone were 63.4%!! this is why its always advantageous to take advantage of trade payables. The cost as of day 11 goes up very very high, then by day 30 its lower but still very high. The logic is intuitive, if you are offered 2/10 net 30 and you dont pay by day 10, you would never pay somebody on day 11, you would always wait until day 30 because for those extra 20 days, you could earn interest.

@Matt: I think beatthecfa was referring to cost of bankers’ acceptances, commercial paper and lines of credit.It’s the last part of the chapter on working capital management.

Oh F that noise, just know that Commercial paper is always cheapest. If you must, just learn the 1 BA formula (because its in the middle), answers on CFA exam are always highest to lowest.