A company is going to open a new division. The division will be financed with $1 million in debt and $3 million in equity. The tax rate is 15% for all firms. The risk-free rate is 1% and market portfolio return is 7%. The yield on the divisions debt is 4%. The information on the relevant pure play companies is given below:

Pure Play Firm	Beta	Debt/Equity
A	1.5	0.6
B	0.8	0.2

What is the cost of equity of the new division?

7.4 & 7.48 is incorrect.