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?

Ervin loan rate is 10.8%

Morten loan rate is 8.80%

Richmond loan rate is 11.00%

Garfield loan rate is 9.50%

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%