ECRI Corporation is a holding company with four main subsidiaries. The percentage of its capital invested in each of the subsidiaries (and their respective betas) are as follows: Subsidiary Percentage of Capital Beta Electric utility 60% 0.70 Cable company 25 0.90 Real estate development 10 1.30 International/special projects 5 1.50 a. What is the holding company’s beta? b. If the risk-free rate is 4% 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 capital in this subsidiary will be reduced to 50%. At the same time, it will increase its reliance on the international/ special projects division, so the percentage of its capital in that subsidiary will rise to 15%. What will the company’s required rate of return be after these changes?
ECRI Corporation is a holding company with
four main subsidiaries. The percentage of its capital invested in each of the subsidiaries
(and their respective betas) are as follows:
Subsidiary Percentage of Capital Beta
Electric utility 60% 0.70
Cable company 25 0.90
Real estate development 10 1.30
International/special projects 5 1.50
a. What is the holding company’s beta?
b. If the risk-free rate is 4% 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 capital in this subsidiary will be
reduced
to 50%. At the same time, it will increase its reliance on the international/
special projects division, so the percentage of its capital in that subsidiary will rise to
15%. What will the company’s required rate of return be after these changes?
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