Bill Gates Corporation is a holding company with four main subsidiaries.The percentage of its business coming from each of the subsidiaries, and their respective betas, are as follows:
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SUBSIDIARY |
BETA |
PERCENTAGE OF BUSINESS (a) |
=B x C |
PERCENTAGE OF BUSINESS(e) |
=B x E |
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Software |
1.8 |
30% |
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Hardware |
1.4 |
20% |
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Outerwear |
0.8 |
40% |
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Underwear |
0.4 |
10% |
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Beta estimate = |
New Beta = |
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a. What is the holding company’s beta? |
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Beta estimate = |
0.00 |
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b. Assume that the risk-free rate is 4 percent and the market risk premium is 6.0 percent. |
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What is the Software subsidiary company’s required rate of return? |
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Required return = |
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c. What would the Software subsidiary company’s required rate of return be if inflation |
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expectations increased by 4%? |
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Required return= |
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d. Return to the original numbers in part b above.What would the Software subsidiary |
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company’s required rate of return be if investor risk aversion increased and the market |
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risk premium rose an additional 3%? |
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Required return= |
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e. Return to the original numbers in part b above.Gates Corp. is considering a change in its |
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strategic focus: it will reduce its reliance on the outerwear subsidiary, so the percentage of its |
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business from this subsidiary will be 30 percent.At the same time, the company will increase its |
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reliance on the hardware division, so the percentage of its business from that subsidiary will |
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rise to 30 percent.What will be the new beta coefficient and shareholder required rate of |
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return for the portfolio if the company adopts these changes? |
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New Beta = |
0.00 |
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Required return= |
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