 For computing WAG of any company, a financial analyst needs to consider certain risk factors so that there should be some consistent in the computation of WAG for the company. And one such risk factor is called as beta. Now what is beta? If we define beta, beta is a parameter that measures the riskiness of investment with reference to the riskiness of the market as a whole. In fact, beta is required when we compute the cost of equity through the capital asset pricing model. The estimation of beta is not an easy task, however, there is a model commonly known as a market model. Through this model, we can estimate the value of beta while regressing the returns of a company against the returns of market. So the resulting value is called as the beta. If we derive the equation of this regression model, we can have an equation like RT is equal to A hat plus beta hat into RM. And over the time period of T, this regression is done. In this equation, A is the estimated intercept of the equation and beta is the estimated slope of the regression that is used as an estimate in order to measure the riskiness of the investment with reference to the whole market. Data estimates are very much sensitive to the estimation model and the data used in the estimation. These factors include estimation period, like the period is shorter at the long term, periodicity of the return interval, whether we have daily returns, quarterly returns or monthly returns. The selection of an appropriate market index, like we have a KS300 index in Pakistan or the use of smoothing technique, what smoothing technique we are using in order to smooth the returns and the final, the adjustment for small capitalization stocks. There are certain risk factors that can have a significant effect on the value of beta. We can divide the systematic component of risk into two components like business risk and financial risk. Business risk can also be further classified into revenue uncertainty or sales risk or the operating risk. So far as the sales risk is concerned, this risk occurs due to the demand elasticity of the product and cyclicity of the revenue and the nature of competition in the market. So far as the operating risk is concerned, this risk occurs due to the combination of variable and fixed operating cost incur in the business operations. The second major component is the financial risk. This risk occurs due to the variation in net income and the net cash flows that are attributable to the debt in terms of interest payment and the repayment of principal. This means that in any company, if the value of debt is higher than the value of equity, then the riskiness of that firm with reference to financial risk is much higher. To determine or estimate beta for a listed or quoted company is very much easy because number one, the returns of such company are easily available on any stock exchange where the firm is listed. Two, it is very much easy to use simple regression model to regress the company's return against the market returns in order to estimate the beta. And third, the value of beta can also be obtained from the professional financial analysis vendors. But so far as estimation of beta for an unlisted firm is concerned, it is much challenging job. It is not as easy to work out. However, there is a solution and the solution is that we can use a proxy beta for such companies or a project using the company's specific available information in combination with the beta of some other comparable listed company. Now the question arises that how to estimate the beta of a unquoted or an unlisted firm. For that purpose, we have a method commonly known as a pure play method. In this method, we work in step steps. First we identify a comparable listed company whose beta is adjusted for financial leverage differences found between the comparable company and the target company. Then this process is generally involves unlevering and leveraging the betas. Now what is a comparable company? By comparable company, we mean a company that has a similar business risk. The method is known as pure play because an easy way to identify a comparable company is to find such a company that has a similar industry or has a similar line of business. This means that the riskiness of that firm is similar to the risk level of the target firm. The pure play method works in four steps. In step one, we need to select a comparable company that has a similar level of risk as the riskiness of the target company. In the second step, we need to estimate the equity beta of the comparable company. Then in the third step, we need to unlever the equity beta of the comparable company through the removal of a financial risk component. But we would be retaining the business risk component in that particular beta. This means the beta with the remaining risk component will be termed as the asset beta. So we are unlevering the equity beta of the comparable company into the asset beta of that comparable company. In the fourth step, we will lever the project's beta by adjusting the asset beta for the project's specific financial risk. This means that the asset beta we found in third step will be converted into levered beta of the project using the financial riskiness and financial capital structure information of that particular project or the target company. Now, how this unlevering and levering of the beta would take place? We know that any company's equity beta can be unlevered in order to estimate the asset beta. This means that in order to do that, we have to develop a relationship between the assets and equity of the company. This means that we have to develop a relationship between the market risk of the company's assets and the market risk of the company's equity. So we are computing the company's assets betas and equity beta. We also know that a company's risk is generally shared by its creditors and its owners and the company's asset risk is basically the weighted average risk of the market riskiness of its debt and the market riskiness of its equity. If we derive an equation, we can develop an equation by saying that the asset beta is equal to the weighted average beta of debt and weighted average beta of equity. Now, we know that there is a ratio between debt and equity and in order to determine that ratio, we need to divide individually debt and equity with the total capital. Here we know that interest is a tax admissible item. This means that when computing the weight of debt in the total capital, the debt weight will be lesser than the total debt due to the tax shield. And to compute the after-tax effect of debt, we need to multiply the debt with the factor of 1 minus t. Here t means the marginal tax rate and we mean here that debt due to secured payment against the company's asset has no market risk. This means that the return on debt does not vary with the market return and this further means that the beta of debt or the riskiness of debt is equal to 0. Then we mean that the beta of asset is similarly equal to the beta of equity and if we rearrange this equation, we can have a beta of asset is equal to the beta of equity or equity beta with a factor of the company's non-diversifiable financial risk. So, we can say that the market risk of a company's equity is basically affected by the asset's market risk and a non-diversifiable risk of the company's financial component. On the screen, we have an example, suppose a company has an equity beta of 1.5, a debt equity ratio of 0.4 and a marginal tax rate of 30%, then what would be the company's asset beta? So, we have an equation of asset beta to first it unleaver. The resulting beta is 1.17, now if we assume that there is a company which have no debt then its asset beta is equal to equity beta which we have just computed at 1.17, now we assume that if we increase the debt, this beta will also be increasing, using this example, we can compute the equity beta given the company's debt equity ratio of 0.5, so putting these value into the equation of equity beta, we have an equity beta of 1.59, so when we have unlevered beta, the value is 1.17 and while delivering this asset beta, we have the equity beta which is 1.59, so the conclusion is that the unlevering computation produces a company's asset beta without considering its capital structure, so we did not consider capital structure of the target company in our computation of asset beta, but when we are delivering the computation for the target company's equity beta, then we are using certain factors like asset beta which is unlevered beta, the target company's tax rate and the target company's capital structure which is 0.5 in our example, so in this way we can determine a project's equity beta through the process of pure play method, while unlevering and delivering certain betas.