Pure Play Method

[keep_running]

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.

 

[olajideanuoluwa001]

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

 

[keep_running]

I found it in the Schweser 2013 curriculum.

 

[olajideanuoluwa001]

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

 

[keep_running]

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.

 

[S2000magician]

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

 

[keep_running]

Just edited the post. Should make more sense now!

 

[S2000magician]

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.

 

[keep_running]

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