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    Beta and Rate of Return

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    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?

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    Solution Preview

    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 ...

    Solution Summary

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