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Question:
Jay Construction Company is considering whether to accept a new bridge-building project. Jay will use the pure-play method to estimate the cost of capital for the project, using Cass Bridge Builders as a comparable company. To calculate the project beta, Jay should:
A
adjust Cass’s equity beta for any difference in leverage between Cass and Jay.
explanation
To use the pure-play method, an asset beta is calculated by removing the effects of leverage (delevering) from the comparable company’s equity beta, then a project beta is estimated by adjusting the asset beta (relevering) based on the capital structure of the company that is evaluating the project.
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