As the result of stockholder pressure, RJR Nabisco is considering spinning off its food division. You have been asked to estimate the beta for the spun-off food division and decide to do so by obtaining the beta of comparable publicly traded firms in the food business. The average beta of comparable publicly traded firms in food business is 0.95, and the average debt/equity ratio of these firms is 35 percent. The spun-off food division is expected to have a debt/equity ratio of 25 percent. The marginal corporate tax rate is 36 percent. (PLEASE SHOW WORK)

1. What will be the business risk (unlevered beta) for Nabisco's food division once the spin off is completed? (Hint: You need to use comparables' information)

a. 0.776

b. 0.95

c. 0.90

2. What will be the levered beta of Nabisco's food division once the spin-off is completed?

a. 0.776

b. 0.95

c. 0.90