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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?

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Answer:

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%

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