Question

Chapter 8 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) are as follows: Subsidiary Percentage of Capital Beta Electric utility 60% 0.70 Cable company 25 0.90 Real estate development 10 1.30 International/special projects 5 1.50 1. What is the holding company's beta? 2. If the risk-free rate is 4% and the market risk premium is 5%, what is the holding company's required rate of return? 3. 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 reduced to 50%. At the same time, it will increase its reliance on the international/special projects division, so the percentage of its capital in that subsidiary will rise to 20%. What will the company's required rate of return be after these changes?

          Chapter 8
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) are as follows:
Subsidiary	Percentage of Capital	Beta
Electric utility	60%	0.70
Cable company	25	0.90
Real estate development	10	1.30
International/special projects	5	1.50
1. What is the holding company's beta?
2. If the risk-free rate is 4% and the market risk premium is 5%, what is the holding
company's required rate of return?
3. 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 reduced to 50%. At the same time, it will increase its reliance on the
international/special projects division, so the percentage of its capital in that
subsidiary will rise to 20%. What will the company's required rate of return be
after these changes?

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Chapter 8
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) are as follows:
Subsidiary Percentage of Capital Beta
Electric utility 60% 0.70
Cable company 25 0.90
Real estate development 10 1.30
International/special projects 5 1.50
1. What is the holding company's beta?
2. If the risk-free rate is 4% and the market risk premium is 5%, what is the holding
company's required rate of return?
3. 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 reduced to 50%. At the same time, it will increase its reliance on the
international/special projects division, so the percentage of its capital in that
subsidiary will rise to 20%. What will the company's required rate of return be
after these changes?

Added by Patricia S.

Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

Instant Answer

Solved by Expert Danielle Fairburn

07/09/2025

Step 1

The weighted beta is calculated by multiplying the percentage of capital invested in each subsidiary by its respective beta. For the electric utility subsidiary, the weighted beta is 60% * 0.70 = 0.42. For the cable company subsidiary, the weighted beta is 25% * Show more…

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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) are as follows: Subsidiary Percentage of Capital Beta Electric utility 60% 0.70 Cable company 25% 0.90 Real estate development 10% 1.30 International/special projects 5% 1.50

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Transcript

00:01 So we have our holding company with four main subsidiaries, and we're given the percentages of capital in each of these, as well as the beta.

00:13 And then the first thing we want to do is calculate the beta for the holding company.

00:19 Well, the beta for the holding company is going to be the sum of the weights times the individual betas of each of the subsidiaries.

00:38 And let's see, i have one, two, three, four.

00:42 So this is weight one, weight two, weight three, weight four.

00:50 And this is beta one, beta two, beta three, and beta four.

00:57 So this then is 60%.

01:03 So these are percentages.

01:06 So it really did it is 0 .60 times 0 .7 plus 25 % is 0 .25 times times beta 2, which is 0 .90, plus 0 .10, times 1 .30, times 1 .30, plus 0 .30, plus 0 .0 .30, plus 0 .0 .0.

01:28 5 which is 5 % times beta 4 which is 1 .50 and that is equal to a total beta of 0 .85.

01:42 And then for question 2 if the risk -free rate is 4 % and the market risk premium is 5 % then what is the holding company's required rate of return? well, that then is going to be, let's see, required.

02:23 That is going to be your risk -free rate plus your beta for the holding company or portfolio, times the difference in the market rate and the risk -free return rate.

02:40 So this then is going to be 4%.

02:43 Plus beta, which is 0 .85, times 5%.

02:50 And that is equal to, let's see, times 5 plus 4...

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