Question

Below are information obtained from Yahoo finance on Eli Lilly (LLY)
Income Statement
Revenue:19.7B; Gross Profit:18.54B; EBITDA:5.33B
Balance Sheet
Total Cash:4.23B; Total Debt :8B; Shareholder’s Equity:16.87B
Ratios
Total Debt/Equity:54.41%; Current Ratio:1.11; Profit Margin:11.91%;    RAO :5.01%;    ROA:3.02%
Trading Information
Beta:0.34; Market Cap:83.78B; YTM on 10 year Treasury Bonds:5.73%; YTM on 10 year DIS Bond:6.37%;    10 year average return on the S&P500:12.2%;              Tax rate:40%

What is LLY's asset beta?

		0.32
		1.48
		0.21
		0.43
		1.88

Answer 1

Asset beta is the unlevere beta of a firm:

Here the beta is levered which is =0.34

Debt/Equity=0.5441(not matching with =8/16.87=0.474215)

Corporate tax rate=40%

U(asset Beta)=L(euity Beta)/(1+(1-tax rate)*Debt/equity

U(asset Beta)=0.34/(1+(1-0.4)*(0.5441)

U(asset Beta)=0.25

if we take the D/E as 0.474215

then U(asset Beta)=0.34/(1+(1-0.4)*(0.474215)

U(asset Beta)=0.26

I thnk there is some discrepency in the information,but above is the approach to solve the question:

The unlevered beta ill be less than the levered beta: so it can be 0.21