Question: 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. The debt to equity ratio (D/E) is 3/7. The companys 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 managers to report on whether these discount rates are properly adjusted for the risk of the projects in the two divisions.

(a) 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?

(b) You estimate that the stock beta of the Korbell Brandy Corp. is 1.8. This company is purely in the brandy business, its debt to equity ratio is 2/3 and its debt beta is 0.2. Based on this information (and on your estimate, from section (b), of Brandywines equity beta), what discount rate would you recommend for projects in the Brandy and in the Wine divisions of Brandywine?

-looking for a more detailed explanation of question (b); already referred to the explanation in this site but still don't getting it