Different loan rates. Winthrop Enterprises is a holding company (a firm that own

Question

Different loan rates. Winthrop Enterprises is a holding company (a firm that owns all or most of some other companies' outstanding stock). Winthrop has four subsidiaries. Each subsidiary borrows capital from the parent company for projects. Ervin Company is successful with its projects 83% of the time, Morten Company 76% of the time, Richmond Company 75% of the time, and Garfield Company 92% of the time. What loan rates should Winthrop Enterprises charge each subsidiary for loans? Different loan rates. Winthrop Enterprises is a holding company (a firm that owns all or most of some other companies' outstanding stock). Winthrop has four subsidiaries. Each subsidiary borrows capital from the parent company for projects. Ervin Company is successful with its projects 83% of the time, Morten Company 76% of the time, Richmond Company 75% of the time, and Garfield Company 92% of the time. What loan rates should Winthrop Enterprises charge each subsidiary for loans?

Explanation / Answer

Let the aggregated loan rate 12% for Winthrop Enterprises and assuming all the four subsidiaries mentioned below has similar capitalization. Then, based on the proportion of success rates, different loan rates can be charged to each of them if all are profitable. In extreme cases of losses, subsidiaries unit can be closed or even loan can be waived off.

Four subsidiaries:

Note: Entire calculation is based on the proportion which is the key methodology in finance. Also, it is assumed that loan is given as 25% in each of the 4 subsidiaries too.

Company Success Rate Fraction and factor (f) Derived Loan Rate, given Expeted Loan Rate = i = 12% Ervin Company 83% 83*4/(83+76+75+92) = 1.01 f*i = 12.12% Morten Company 76% 76*4/(83+76+75+92) = 0.93 11.16% Richmond Company 75% 75*4/(83+76+75+92) = 0.92 11.04% Garfield Company 92% 92*4/(83+76+75+92) = 1.13 13.56%

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