Business, 10.03.2020 09:31 BaileyElizabethRay

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 % of business Beta
Electric utilities 60 0.70
Cable company 25 0.90
Real estate 10 1.30
International/
special projects 5 1.50

(a) What is the holding company’s beta?
(b) Assume that the risk-free rate is 6% and that 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 that the percentage of its business from the subsidiary will be 50%. At the same time, ECRI will increase its reliance on the international/special projects division, and the percentage of its business from that subsidiary will rise to 15%.
What will be the shareholders’ required rate of return if management adopts these changes?

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ECRI Corporation is a holding company with four main subsidiaries. The percentage of its business co...

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