A Note on The Estimation of Betas for Single Industry Companies

Abstract

In order to use the Capital Asset Pricing Model to estimate the cost of equity capital for an unquoted firm, it is often necessary to use the “pure-play” technique to obtain a surrogate beta with an appropriate asset structure for the unquoted firm.

This paper identities betas tor single industry industrial companies listed on the Johannesburg Stock Exchange, it is shown that of the 121 such companies less than half have beta values that are significantly different from zero at the 95% level.

This represents a serious inhibiting factor in the application of the Capital Asset Pricing Model to unlisted companies in South Africa.

Keywords:

• pure-play
• beta coefficient
• unlisted
• cost of equity
• single industry

Additional information

Notes on contributors

Colin Firer

Colin Firer is Dean of the Faculty of Management, at the Graduate School of Business Administration, University of the Witwatersrand

Trevor A Thompson

Trevor Thompson is a masters graduate of the Graduate School of Business Administration, University of the Witwatersrand