The current risk-free rate is 4% and the expected rate of return on the market portfolio is 10%. The Brandywine Corporation has two divisions of equal market value, i,e. the market value of their assets is the same. The debt to equity ratio (D/E) is 3/7. The company's debt can be assumed to present no risk of default . For the last few years, the Brandy division has been using a discount rate of 12% in capital budgeting decisions and the Wine division a discount rate of 10%. You have been asked by their manager to report on whether these discount rates are properly adjusted for the risk of the projects in 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 the equity beta implicit in the discount rates used by the two divisions?

(c) you estimate that the equity beta of Korbell Brandy Corp. is 1.8. This company is purely in the brandy business, its debt to equity ratio 2/3 and its debt beta is 0.2. Based on this info (and on your estimate of Brandywine's equity beta in part (b)), what discount rates would you recommend for projects in the Brandy and in the Wine divisions of Benaywine?