A company is in the process of estimating EVA for two of its divisions: beverages and restaurants. The estimation of EVA requires an estimate of divisional cost of capital. The industry beta and average debt ratio for several industry groups is as follows:

Industry Cost of Cost of Debt/ Cost of Industry lev. beta equity (percent) debt (percent) capital (percent) capital (percent)

Aerospace 0.68 8.6 9.1 38.6 7.3 Airlines 0.89 10.8 9.8 70.4 7.4 Beverages 0.89 10 8.1 45.7 9.3 Cars & trucks 1.03 12.4 8.5 46.6 8.7 Computers & peripherals 1.36 12.9 8.6 30.7 12.7 Electronics 1.51 14.1 10.6 39.1 13.5 Oil & gas (integrated) 0.60 7.9 8.6 46.7 6.9 Restaurants 0.80 9.5 10 46.4 8.6 Source: Stern Stewart & Co.

The beverages division has a target debt/value ratio of 40 percent and the restaurants’ division has a target debt ratio of 35 percent. Calculate the cost of equity for the divisions assuming a risk-free rate of 6 percent and a risk premium of 7.5 percent.