Question

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 93​% of the​ time, Morten Company 76​% of the​ time, Richmond Company 95 % of the​ time, and Garfield Company 82​% of the time. What loan rates should Winthrop Enterprises charge each subsidiary for​ loans?

Answer 1

Ervin loan rate is 10.8%

Morten loan rate is 8.80%

Richmond loan rate is 11.00%

Garfield loan rate is 9.50%

Step-by-step explanation:

The amount to charge to each subsidiary is the weighting of each subsidiary project success rate multiplied by aggregate loan rate.

Ervin subsidiary project success weighting=(93%*4)/(93%+76%+95%+82%)

=1.08

the figure 4 represents 4 subsidiaries

Morten subsidiary project success weighting=(76%*4)/(93%+76%+95%+82%)

=0.88

Richmond subsidiary project success weighting=(95%*4)/(93%+76%+95%+82%)

=1.10

Garfield subsidiary project success weighting=(82%*4)/(93%+76%+95%+82%)

=0.95

Assuming the aggregate loan rate is 10%

Ervin loan rate=10%*1.08

=10.8%

Morten loan rate=10%*0.88

=8.80%

Richmond loan rate=10%*1.10

=11.00%

Garfield loan rate=10%*0.95

=9.5%