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
Int’l Special Pjt 5 1.50
What is the holding company’s beta?
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?
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?