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Unformatted text preview: market. The pure play approach or pure play method is a method for estimating the cost of capital for a proposed new project or product line. It involves examining other companies, which are pure plays in the proposed line of business and inferring a cost of capital based on their capital structures (e.g., Debt-to-Equity ratio) and betas. Two firms in the same industry could have very different equity betas. One possibility is that the companies use different production technologies with different degrees of operating leverage. Operating leverage measures a firm's fixed versus variable costs. The greater proportion of fixed costs, the greater the operating leverage. Another is that the companies make different financing decisions, with one firm using more debt than the other. The firm using more debt financing will have a higher equity beta....
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- Spring '11