An analyst wants to use the CAPM approach to compute the equity cost of a private company but he doesn’t know the equity beta. He gathered the following information about the company and its publicly traded competitor:
　　Comparable CompaniesTax Rate (%)Debt/EquityEquity Beta
　　Private company30.00.80N.A.
　　Public company35.01.202.35
　　Using the pure-play method, the estimated equity beta for the private company is closest to:
　　A.1.32.
　　B.1.92.
　　C.2.06.
　　Correct Answer: C
　　Inferring the asset beta for the public company: unlevered beta = 2.35/[1 + (1 - 0.35) (1.20)] = 1.32. Re-levering to reflect the target debt ratio of the private firm: levered beta = 1.32 x [1 + (1 - 0.30) (0.80)] = 2.06.