Question No: 01 ABCD, a Textile mill,has four main businesses. Beta and percenta

Question

Question No: 01

ABCD, a Textile mill,has four main businesses. Beta and percentage of each businessis

as follows:

Business            Investmentin each businessRs.              Beta

T-Shirts                               100,000                                      1.50

Jackets                                200,000                                     (0.50)

ChildrenGarments               300,000                                       1.25

Pants &Trousers                400,000                                        0.75

Requirement:(5+5+5 Marks)

• What is the beta of ABCD Corporation?

• After the analysis of the market, followinginformation was gathered: risk free rate is 6% and market riskpremium is 5%. What is the ABCD Corporation’s required rateof return?

• The above mentioned company is considering thechange in its strategic focus due to changing market trends. As aresult, it want to focus more on children garments, now 50% of itstotal investment will be in Children Garments and this change willreduce its reliance on Pants & Trousers business, while theinvestment in T-Shirts and Jackets will remain the same. What willbe the shareholder’s required rate of return if ABCD adoptsthese changes?

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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