Pure play

Pure play refers to a company focuses on a particular product or activity instead of various interests. Investing in a pure play can be considered as investing in a particular commodity or product of a company.

Pure play method

Pure play method is an approach to estimate beta coefficient of private companies, which involves examining beta coefficient of other public and single focused companies.

Formula

The equity beta coefficient of a public company B is needed when estimating a private company A’s equity beta coefficient. The equity beta coefficient of company B can be calculated by regressing return on its stock on the return on the relevant stock index. Then applying following calculation to get beta coefficient of company A.

Unlevered bata of B = (Equity) Beta Coefficient of B / (1 + DE_B × (1 − Tax Rate_B))

(Equity) Beta A = Unlevered Beta of B × (1 + DE_A × (1 − Tax Rate_A))Where DE_A and DE_B are the debt to equity ratios of company A and B respectively.

See also

• Diversification (strategy)

Further reading

• Cleveland S. Patterson (1995). "Estimating for non-traded assets". The Cost of Capital: Theory and Estimation. Quorum/Greenwood. pp. 221–224. ISBN 0-89930-862-7. OCLC 31012404.
• John Frederick Weston and Eugene F. Brigham (1974). "The Pure Play Method". Essentials of managerial finance. Dryden Press. pp. 623–624. ISBN 0-03-030733-3.
• N.R. Parasuraman (November 2002). "Ascertaining the divisional Beta for project evaluation — the Pure Play Method — a discussion" (PDF). The Chartered Accountant. 31 (5): 546–549.
• Collier, HW; Grai, T; Haslitt, S; and McGowan, CB (October 2006). "Computing the divisional cost of capital using the pure play method" (PDF). Applied Financial Economics Journal. Taylor and Francis.{{cite journal}}: CS1 maint: multiple names: authors list (link)
• Larry A. Cox and Gary L. Griepentrog (September 1988). "The Pure-Play Cost of Equity for Insurance Divisions". The Journal of Risk and Insurance. 55 (3): 442–452. doi:10.2307/253253. JSTOR 253253.