The current risk-free rate is 4% and the expected rate of return on the market portfoliois 10%. The Brandywine Corporation has two divisions of equal market value, i.e. themarket value of their assets is the same. The debt to equity ratio (D=E) is 3/7. Thecompanyís debt can be assumed to present no risk of default. For the last few years, theBrandy division has been using a discount rate of 12% in capital budgeting decisions andthe Wine division a discount rate of 10%. You have been asked by their managers toreport on whether these discount rates are properly adjusted for the risk of the projectsin the two divisions.

(a) What are the betas of typical projects implicit in the discount rates used by the two
divisions?
(b) You estimate that the equity beta of Brandywine is 1.6. Is this consistent with theequity beta implicit in the discount rates used by the two divisions?
(c) You estimate that the equity beta of the Korbell Brandy Corp. is 1.8. This companyis purely in the brandy business, its debt to equity ratio is 2/3 and its debt beta is0.2. Based on this information (and on your estimate of Brandywineís equity betain part (b)), what discount rates would you recommend for projects in the Brandyand in the Wine divisions of Brandywine?