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SS Ltd is a listed company that operates three divisions, all focused on single activities as shown in the table below. SS Ltd identified a

SS Ltd is a listed company that operates three divisions, all focused on single activities as shown in the table below. SS Ltd identified a surrogate listed company for each of its divisions in order to calculate cut-off rates for new investments.

Division Proxy Beta Assets employed ($m)

A 0.7 3

B 1.1 8

C 0.8 4

Total 15

The company has T-bill investments, valued at $3 million, earning 2 percent. The stock market returns averaged 12 percent per year for the last ten years.

Required:

  1. Calculate the required return for each division.
  2. Assume conditions of the CAPM are met. Calculate SS Ltds overall rate of return.
  3. Assume SS Ltd sold its T-bills and re-invested the entire sum in a new (fourth) division with a beta value of 0.78. Comment if the overall risk of SS Ltd will decrease, increase or remain more or less the same. Why?

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