Asked by Alfred Lopez on Jun 26, 2024
Verified
In using the ___________ approach to estimating the cost of capital for a division, an analyst proceeds by observing the returns for a firm whose operations are in the same risk class as the division.
A) Pure play.
B) Conglomerate.
C) Market specialist.
D) Correspondent division.
E) Parallel risk class.
Pure Play Approach
An investment strategy that focuses on companies specializing in a single line of business or product, enhancing portfolio focus but potentially increasing risk.
Cost Of Capital
The minimum rate of return a company must earn on its investments to maintain its market value and attract funds.
Risk Class
A categorization that reflects the level of risk associated with an investment, used to align investments with an investor's risk tolerance.
- Comprehend the methods businesses employ to calculate the weighted average cost of capital (WACC) for specific projects, including the use of the pure play method and subjective methodologies.
Verified Answer
JB
Jason BarnesJun 28, 2024
Final Answer :
A
Explanation :
The Pure Play approach involves estimating the cost of capital for a division by observing the returns of firms that are exclusively engaged in similar lines of business, thus sharing the same risk class. This method is preferred for its direct comparison with companies of similar risk profiles.
Learning Objectives
- Comprehend the methods businesses employ to calculate the weighted average cost of capital (WACC) for specific projects, including the use of the pure play method and subjective methodologies.