ABCD, a Textile mill, has four main businesses. Beta andpercentage of each busin

Question

ABCD, a Textile mill, has four main businesses. Beta andpercentage of each business is

as follows:

Business            Investment in$                               Beta

T-Shirts               100,000                                     1.50

Jackets                 200,000                                   (0.50)

Children Garments   300,000                               1.25

Pants & Trousers   400,000                                0.75

Requirement:

• What is the beta of ABCD Corporation?

• After the analysis of the market, following informationwas gathered: risk free

rate is 6% and market risk premium is 5%. What is the ABCDCorporation’s

required rate of return?

• The above mentioned company is considering the change inits strategic focus due

to changing market trends. As a result, it want to focus more onchildren

garments, now 50% of its total investment will be in ChildrenGarments and this

change will reduce its reliance on Pants & Trousersbusiness, while the

investment in T-Shirts and Jackets will remain the same. Whatwill be the

Explanation / Answer

1. Beta of ABCD corp is weighted avge of individualinvestments. Weighted avge for Tshirt is 100,000/1,000,000=0.1 & so on So Beta = 0.1*1.5 + 0.2*(-0.5) + 0.3*1.25+0.4*0.75 = 0.725 2. ABCD Reqd rate of Return Ks=Krf+RPm*Beta = 0.06+0.05*0.725 =9.625% 3. Children garments will be 500,000, Tshirt is 100,000, Jacket is200,000 & Pants is 200,000 Revised Beta will be 0.1*1.5 + 0.2*(-0.5) + 0.5*1.25+0.2*0.75= 0.825 Revised ABCD Reqd rate of Return Ks=Krf+RPm*Beta =0.06+0.05*0.825 = 10.125%

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