Problem: ABC Company is a holding company with three subsidiaries. The following data pertains to these subsidiaries:
Subsidiary Business percentage Beta
A 50 .8
B 30 1.1
C 20 1.2
1. What is the holding company's beta?
2. Assume that the RFR is 5% and MRP is 4%, what is the holding company required rate of return?
3. Assume that ABC is planning to acquire M, the following are data pertains to this option:
The business percentage of M will be 40%
The beta of M is estimated to be 1.1
The other subsidiaries business percentages will remain in the same proportions as before.
What is the shareholders required rate of return if the company acquires M?