On February 4, 2010, BusinessWeek.com reported: Warren Buffetts Berkshire Hathaway was stripped of its last AAA credit rating by Standard & Poors after the billionaire investor agreed to buy railroad Burlington Northern Santa Fe Corp. [BNSF]. Berkshire, which is taking on debt to fund the $26 billion takeover, was cut one level to AA+ from S&Ps highest grade, the ratings firm said today.... The downgrade came the same day Berkshire filed to sell $8 billion of bonds to fund the Burlington Northern purchase. The sale of the senior unsecured notes was completed after the ratings company announced its decision, ... The railroad deal is expected to be completed by the end of March, Berkshire has said. ... Corporate debt with an AA rating yields an average of 3.72 percent, or 12 basis points more than AAA bonds, ... as of yesterday. That means companies ranked AA pay an average of $1.2 million a year in extra interest costs on $1 billion of debt. ...

Berkshire Hathaway owns significant stakes in a number of different companies as well as several companies outright. These companies are in a variety of industries ranging from Dairy Queena fast food restaurant chain--to Sees Candiesa confectionary chainto GEICOan insurance company, among others. Berkshire typically retains the senior management and capital structures of the companies it acquires. According to Yahoo! Finance Burlington Northern has a beta of 1.04 while Berkshire Hathaway has a beta of 0.57. Suppose the downgrade by S&P causes Berkshire Hathaway to pay 12 basis points more on its borrowings to fund the acquisition of Burlington Northern. The discount rate used to value BNSF cash flows on a stand-alone basis should:

A. Increase by 12 basis points weighted by the fraction of debt in the BH capital structure

B. Increase by 12 basis points multiplied by one minus the tax rate for Berkshire and weighted by the fraction of debt in the BH capital structure

C. Decrease by 12 basis points weighted by the fraction of debt in BH capital structure

D. Increase by 12 basis points multiplied by one minus the tax rate for BNSF weighted by the fraction of debt in BNSFs capital structure and its weight in BH

E. None of the above