BETA AND THE REQUIRED RATE OF RETURN 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

a. What is the holding company’s beta?

b. If the risk-free rate is 6% and 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 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 15%. What will the company’s required rate of return be after these changes?

AppendixLO1