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 this 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?

Problems Answers Appear in Appendix B EASY PROBLEMS 1–3