CFA Practice Question

CFA Practice Question

Ace Consulting, a multinational corporate finance consulting firm, is examining the operations of Minishabby Farms, an Irish conglomerate who is considering the development of a new distilling process for their specialty spirits division. In order to determine the feasibility of the new distilling process, Ace Consulting is trying to determine the beta of the proposed project. In their analysis, Ace Consulting begins by identifying publicly-traded companies whose operations are solely within the distilling business. Ace identifies four such firms, determines the beta of each Company, and averages them together. This figure is used as the beta of the proposed project. Which of the following techniques most correctly describes this method of identifying individual project betas?
A. Monte Carlo simulation
B. Pure play method
C. Case study analysis
Explanation: In this example, Ace Consulting has used the beta coefficient of four firms whose business is solely within the distilling process. These firms are "pure plays" in the distilling field. The Pure Play method of determining project betas is a popular technique in corporate finance, most likely due to its ease of use. However, the identification of "pure play" firms is often difficult for certain projects. In these cases, the second method of determining project betas is employed, the Accounting Beta method.

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