ECRI Corporation is a holding company with four main subsidiaries. The percentage of its capital invested in each of the subsidiaries (and their respective betas) are as follows: Subsidiary Percentage...

ECRI Corporation is a holding company with
four main subsidiaries. The percentage of its capital invested in each of the subsidiaries
(and their respective betas) are as follows:
Subsidiary                    Percentage of Capital                          Beta
Electric utility                              60%                                        0.70
Cable company                            25                                          0.90
Real estate development             10                                           1.30
International/special projects       5                                            1.50
a. What is the holding company’s beta?
b. If the risk-free rate is 4% and the market risk premium is 5%, what is the holding
company’s required rate of return?
c. ECRI is considering a change in its strategic focus; it will reduce its reliance on the
electric utility subsidiary, so the percentage of its capital in this subsidiary will be
reduced
to 50%. At the same time, it will increase its reliance on the international/
special projects division, so the percentage of its capital in that subsidiary will rise to
15%. What will the company’s required rate of return be after these changes?