Gamma Corporation has 2 business divisions; division Phi and division Epsilon. Division Phi has a much higher risk level while division Epsilon has a much lower risk level compared to the parent company. The following information is available on the parent company, its two divisions, and the market:

Gamma Corporation: = 1.4, W_D = 40%, W_E = 60%, tax rate = 40%, R_D = 10%

Phi division: D/E = 1.5

Epsilon division: D/E = 1.0

Market information: Return on government 3 month T-bill = 7%, Expected return on the TSX = 12%

Gamma Corporation is evaluating new projects from each of the two divisions. It was able to find a pure play company for division Epsilon. Information for pure play company is provided below:

Pure play for Epsilon: = 0.5, W_D = 35%, W_E = 65%, tax rate = 30%

However, it was unable to find a pure play company for division Phi. Hence management at Gamma Corporation decided to adjust for the risk of the division by adding or subtracting 3 percent to the company wide cost of capital.

Determine the appropriate discount rate that each division should use to evaluate its projects?