Question

Luther industries has a market capitalization of $25 billion, no debt, and $5 billion in cash. If Luther's estimated equity beta is 1.30, then the beta of Luther's underlying business enterprise is closest to:

a) 1.30
b) 1.50
c) 1.00
d) 0.75

Answer 1

The beta of Luther's underlying business enterprise is closest to 1.30 since the company has no debt, meaning its equity beta is already un-levered.

Step-by-step explanation:

The question relates to the beta of Luther Industries' underlying business enterprise, given its market capitalization, lack of debt, cash on hand, and equity beta. The un-levered beta (beta of the business without the impact of debt) is what the question is asking for. Typically, to find the un-levered beta, you would use the formula to remove the effect of leverage from the firm's equity beta. However, since Luther Industries has no debt, its equity beta of 1.30 is already un-levered. Therefore, the beta of Luther's underlying business enterprise would be closest to 1.30, making option (a) the correct answer.