(174)---THE PURE PLAY TECHNIQUE

The Pure Play Technique

Identify Comparable Firms

The critical step is the identification of comparable or pure play firms. These firms should have business identical to the division or the project. It is rate to find perfectly comparable or pure play firms in practice, as any two firms in the same line of business cannot have exactly similar features; they would have some differences. However, it is not impossible to identify approximately equivalent matches in terms of product line and product mixes. One or two good matches would suffice as proxy for the division or the project. If good matches cannot be found, the average data of a broader sample of firms should be used to even out the differences.

Estimate equity betas for comparable firms

Once the comparable or the pure play firms have been identified, their betas should be calculated using CAPM framework and a market index such as senses. Alternatively, we can use betas computed by organizations like the stock exchange or any other agency. These betas are based on the share price and the market index data. Hence they are the equity betas for the pure play firms. An equity beta is also called leverage beta.