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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 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

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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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

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