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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:
- Calculate the required return for each division.
- Assume conditions of the CAPM are met. Calculate SS Ltds overall rate of return.
- 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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