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Beta and Rate of Return

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?

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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