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 Percentage of Business Beta
Electric utility 60% .70
Cable company 25% .90
Real estate 10% 1.30
International/special projects 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 this sub- sidiary will be 50%. At the same time, ECRI will increase its reliance on the in- ternational/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?