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4. The tax rate of JNJ is assumed to be 34%.
The debt-to-equity ratio by market value, as calculated from the previous report, is 21.9%
Therefore the asset beta of Johnson & Johnson is as follows:
Ba = [1+ (1-T)(D*/E*) / Be Ba = [1+(1-.34)(.219)] / 0.36
Ba = 3.179
I am not surprised by the asset beta of Johnson and Johnson. The asset beta reflects the degree to which the company's business performance is related to the overall performance of the economy. Intuitively, JNJ's business is not strongly related to the economy. They product everyday consumer products that are not luxury items, and they produce pharmaceuticals that again are fairly essential items to their consumers. This reduces...
The asset beta of JNJ is above the risk-free rate, representing some business risk, but not much. The business is stable, and the company's financials are as well. The relatively low asset beta reflects this stability and demand inelasticity.
Works Cited
Treasury rates sourced from Bloomberg, retrieved July 30, 2008 at http://www.bloomberg.com/markets/rates/
Beta of JNJ sourced from Reuters, retrieved July 30, 2008 at http://www.reuters.com/finance/stocks/overview?symbol=JNJ.N
Debt/Equity of JNJ sourced from Reuters, retrieved July 30, 2008 at http://www.reuters.com/finance/stocks/incomeStatement?stmtType=BAL&perType=INT&symbol=JNJ.N
Works Cited
Treasury rates sourced from Bloomberg, retrieved July 30, 2008 at http://www.bloomberg.com/markets/rates/
Beta of JNJ sourced from Reuters, retrieved July 30, 2008 at http://www.reuters.com/finance/stocks/overview?symbol=JNJ.N
Debt/Equity of JNJ sourced from Reuters, retrieved July 30, 2008 at http://www.reuters.com/finance/stocks/incomeStatement?stmtType=BAL&perType=INT&symbol=JNJ.N
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