Under which of the following circumstances is the pure play method of estimating a project's beta particularly useful?
A)The firm is looking to expand its current business operations,doing essentially the same work.
B)The firm is looking to expand its current business operations into a brand new area unlike any of its internal projects.
C)The firm is looking to expand its current business operations.The work will be essentially the same as current operations but there is no obvious outside provider of the same service or product.
D)The pure play method works equally effectively under each and all of these scenarios.

Question

Quizplus · Accepted Answer

The pure play method is particularly useful when a firm is considering entering into a new and unique line of business that it has not previously been involved in. This is because the method relies on identifying existing companies that are comparable to the new venture and whose betas can be used to estimate the beta of the new project. In scenario B, the firm is expanding into a new area unlike any of its internal projects, which makes the pure play method a relevant and suitable approach to estimate the project's beta. In scenarios A and C, where the firm is essentially expanding its current operations, other methods such as the historical beta or the adjusted beta might be more appropriate.

Under Which of the Following Circumstances Is the Pure Play