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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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The solution goes into a great amount of detail related to the rate of return question being asked. The solution is very easy to follow along and can be easily understood by anyone with a basic understanding of the concepts. The solution answers all the question(s) being asked in a succinct way. Overall, an excellent response.

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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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