Question

Why do we use the pure-play method rather than the capital asset pricing model to determine the required rate of return?

Answer #1

Pure play method is a method to estimate the beta coefficient of the company who stock is not publicly traded and which is a private company or a startup.

It involves finding beta coefficient of a business which is publicly listed and having single focus business and then it is used to unlever and then relever at the first company capital structure, to find the beta coefficient.

The formula can be as follows

Beta (private company)= unlevered beta of publicly listed company×(1+debt to equity ratio of company which is publicly listed× (1-Tax rate).

We use the Capital Asset Pricing Model to calculate prices of
capital assets.
a. True
b. False

Use the basic equation for the capital asset pricing model
(CAPM) to work each of the following problems.
a. Find the required return for an asset with a beta of 0.84
when the risk-free rate and market return are 77% and 15 %
respectively.
b. Find the risk-free rate for a firm with a required return of
7.394% and a beta of 1.16 when the market return is 7 %.
c. Find the market return for an asset with a...

Explain why this statement is true or false: The capital asset
pricing model predicts that security with a beta less than zero
will provide an expected return higher than the market portfolio
return.
Explain why this statement is true or false: According to CAPM,
the price of a security will fall if its expected rate of return
lies above the security market line.

Use the basic equation for the capital asset pricing
model(CAPM) to work each of the following problems.
a. Find the required return for an asset with a beta of 1.51
when the risk-free rate and market return are 8% and 10%
respectively.
b. Find the risk-free rate for a firm with a required return of
9.791% and a beta of 0.97 when the market return is 10%.
c. Find the market return for an asset with a required return of...

Manipulating CAPM Use the basic equation for the capital asset
pricing model (CAPM) to work each of the following problems.
a. Find the required return for an asset with a beta of 0.54
when the risk-free rate and market return are 6 % and 8 % ,
respectively.
b. Find the risk-free rate for a firm with a required return
of 6.368 % and a beta of 0.26 when the market return is 11 % .
c. Find the market...

Examples of capital asset pricing model (CAPM), when it comes to
the required rate of return.

The capital asset pricing model suggests that the required
return on a firm's stock is a positive function of:
unsystematic risk
the market rate of return
the competitor fs cost of equity
All of these are correct.

8
San Diego Gas and Electronic Company’s treasurer uses both the
capital asset pricing model and the dividend valuation model to
compute the cost of common equity (also referred to as the required
rate of return for common equity).
Assume: Rf = 6 % Km = 9 % β = 2.2 D1 = $ .70 P0 = $ 15 g = 6
%
a. Compute Ki (required rate of return on
common equity based on the capital asset pricing model)....

Use the Capital Asset Pricing Model to calculate the expected
return of two stocks (X and Y) with the following characteristics:
Beta for Stock X = 1.50: Beta for Stock Y = 0.75: Expected market
Return = 9%, and 10-Year Treasury Note Rate = 3%. (Must show work
to receive full credit)

Manipulating CAPM???Use the basic equation for the capital asset
pricing model ?(CAPM?) to work each of the following problems.
a.??Find the required return for an asset with a beta of 0.810.81
when the? risk-free rate and market return are 99?% and 17 %17%?,
respectively. b.??Find the ?risk-free rate for a firm with a
required return of 12.98212.982?% and a beta of 1.891.89 when the
market return is 10 %10%. c.??Find the market return for an asset
with a required return...

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