ABB plc has a cost of capital of 20 per cent p.a., and it is expected to generate annual end of year cash inflows of £12m a year for ever.

The capital projects department has identified a smaller business, CDD Ltd, which it is believed would be a suitable takeover target for ABB plc. It is estimated that the combined operation would have a perpetual end-of-year cash inflow of £14m.

ABB plc’s capital projects department analysts estimate that it would be worth the business paying up to £27.5m to acquire the entire equity of CDD Ltd.

What cost of capital must the analysts have estimated for the combined operation?
(Ignore taxation.)