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(c) James Christopher is especially interested in the marine engine operations. This activity he estimates to comprise 40%

of total value of Cathcart Industries pIc. Cathcart's present capital structure comprises 80% equity and 20% debt.

He has identified an independent competitor, Avon Engines pIc, wh ich has 30% debt as a proportion of its capital structure and an estimated equity beta of 1.5.

Christopher estimates the riskless rate of interest to be 9%, while the expected return on the market portfolio of all risky assets is 18%.

Determine the marine engine activity's cost of capital when: