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) is as follows:

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 re duced to 50%. At the same time, it will increase the firm’s 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?

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Subsidiary Electric utility Cable company Real estate development International/special projects Percentage of Capital 60% 25 10 5 Beta 0.70 0.90 1.30 1.50