ABC Company is a holding company with three subsidiaries. The following data pertains to these subsidiaries:
Subsidiary Business percentage Beta
A 50 .8
B 30 1.1
C 20 1.2
1. What is the holding company's beta?
2. Assume that the RFR is 5% and MRP is 4%, what is the holding company required rate of return?
3. Assume that ABC is planning to acquire M, the following are data pertains to this option:
The business percentage of M will be 40%
The beta of M is estimated to be 1.1
The other subsidiaries business percentages will remain in the same proportions as before.
What is the shareholders required rate of return if the company acquires M?© BrainMass Inc. brainmass.com March 21, 2019, 7:41 pm ad1c9bdddf
1. Holding company's beta = .8*.50 + 1.1*.30 + 1.2*.20 = 0.97
2. Required Rate of Return = 5% + 0.97*4% = 8.88%
3. After the acquisition, following ...
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