ECRI is considering a change in its strategic focus; it will reduce its reliance on the electric utility subsidiary,
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BETA AND THE REQUIRED RATE OF RETURN 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) is as follows: a. What is the holding company’s beta? BETA AND THE REQUIRED RATE OF RETURN 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) is as follows: 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? BETA AND THE REQUIRED RATE OF RETURN 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) is as follows: 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 re duced to 50%. At the same time, it will increase the firm’s 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? |
part a
Explanation
Calculate weighted average portfolio beta.
Beta = Sum of (Weighted Averages x Betas)
=(.6 x .7) + (.25 x .9) + (.10 x 1.3) + (.05 x 1.50)
= .85
Verified Answer
Beta = .85
part b
Explanation
Calculate required rate of return (RR).
RR = Risk Free Return + (Market Risk Premium x Beta)
=.04 + (.05 x .85)
= 8.25%
Verified Answer
Required rate of return = 8.25%
part c
Step 1 of 2
Calculate weighted average portfolio beta.
Beta = Sum of (Weighted Averages x Betas)
=(.5 x .7) + (.25 x .9) + (.10 x 1.3) + (.15 x 1.50)
= .93
Step 2 of 2
Calculate required rate of return (RR).
RR = Risk Free Return + (Market Risk Premium x Beta)
=.04 + (.05 x .93)
= 8.65%
Final answer
Beta = .93
Required rate of return = 8.65%
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