Which of the following methods involves calculating an average beta for firms in a similar business and then applying that beta to determine the beta of its own project?
A) Risk premium method.
B) Pure play method.
C) Accounting beta method.
D) CAPM method.
E) Answers b and c are both correct.

Question

Quizplus · Accepted Answer

The pure play method involves identifying publicly traded firms in a similar business as the project and calculating an average beta for them. This average beta is then applied to determine the beta of the project. Therefore, option B is the correct choice. The risk premium method involves adding a premium to the risk-free rate to determine the required rate of return. The accounting beta method involves estimating the beta by examining the company's financial statements. The CAPM method uses market risk premium, risk-free rate, and beta to calculate expected returns. Option E is incorrect because the accounting beta method is not applicable in this case.

Which of the Following Methods Involves Calculating an Average Beta