Brandon Wiene is a financial analyst covering the beverage industry. He is evaluating the impact of DEF Beverage’s new product line of flavored waters. DEF currently has a debt-to-equity ratio of 0.6. The new product line would be financed with \($50\) million of debt and \($100\) million of equity. In estimating the valuation impact of this new product line on DEF’s value, Wiene has estimated the equity beta and asset beta of comparable companies. In calculating the equity beta for the product line, Wiene is intending to use DEF’s existing capital structure when converting the asset beta into a project beta.

Which of the following statements is correct?

A. Using DEF’s debt-to-equity ratio of 0.6 is appropriate in calculating the new product line’s equity beta.

B. Using DEF’s debt-to-equity ratio of 0.6 is not appropriate, but rather the debt-toequity ratio of the new product, 0.5, is appropriate to use in calculating the new product line’s equity beta.

C. Wiene should use the new debt-to-equity ratio of DEF that would result from the additional \($50\) million debt and \($100\) million equity in calculating the new product line’s equity beta.