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).