Project’s beta is a measure of systematic or market risk present in a particular project. It is used to adjust for differences between project’s risk and firm’s average risk.
Project’s beta is estimated using ‘Pure play method’. This method has three steps:
Step 1: Shortlist comparable publicly traded companies.
Step 2: Derive unlevered beta or comparable asset beta for the project using comparable company’s D/E and tax rate:
Step3: Get the equity levered beta for the project using project specific D/E and tax rate:
Drawbacks of “Pure Play” method: