ECRI Corporation is a holding company with four main subsidiaries. The percentage of its business coming from each of the subsidiaries, and their respective betas, are as follows: Subsidiary Percentage of Business Beta Electric utility 60% 0.70 Cable company 25 0.90 Real estate 10 1.30 International/special projects 5 1.50 What is the holding company’s beta? b. Assume that the risk-free rate is 6% and the market risk premium is 5%. What is the holding company’s required rate of return? c. ECRI is considering a change in its strategic focus: it will reduce its reliance on the electric utility subsidiary, so the percentage of its business from this subsidiary will be 50%. At the same time, ECRI will increase its reliance on the international/special projects division, so the percentage of its business from that subsidiary will rise to 15%. What will be the shareholders’ required rate of return if they adopt these changes? DO NOT USE EXCEL
ECRI Corporation is a holding company with four main subsidiaries. The percentage of its business coming from each of the subsidiaries, and their respective
betas, are as follows:
Subsidiary Percentage of Business Beta
Electric utility 60% 0.70
Cable company 25 0.90
Real estate 10 1.30
International/special projects 5 1.50
What is the holding company’s beta?
b. Assume that the risk-free rate is 6% and the market risk premium is 5%. What
is the holding company’s required
c. ECRI is considering a change in its strategic focus: it will reduce its reliance on
the electric utility subsidiary, so the percentage of its business from this subsidiary will be 50%. At the same time, ECRI will increase its reliance on the
international/special projects division, so the percentage of its business from
that subsidiary will rise to 15%. What will be the shareholders’ required rate
of return if they adopt these changes?
DO NOT USE EXCEL
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