A Private firm stock analyst is trying to estimate the cost of equity capital of Johnson Machine Tool (private firm). The analyst could not estimate the beta of the Johnson because the stock prices of the firm were not available. Currently, there are three public firms in the machine tool industry. Information of these firms is as follows:

Name Equity Beta(_E ) D/E ratio

Mach_1 1.2 0.2

Mach_2 1.5 0.3

Mach_3 2.0 0.5

The Equity Beta (_E) is same as levered beta (_L). The risk-free rate is 6 percent and the market risk premium, (r_M r_RF), is 5.0 percent. Johnson and all other firm have a marginal tax rate of 40 percent and Johnsons D/E ratio is 0.8.

Estimate the cost of equity capital of the Johnson.

(Assume that the average industry unlevered beta is same as the unlevered beta of Johnson.)