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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

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?

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