Amarindo, Inc. (AMR), is a newly public firm with

11.5

million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be

$14.98

million, and you expect the firm's free cash flows to grow by

3.7

%

per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMR's equity beta. However, you do have beta data for UAL, another firm in the same industry:

. Equity Beta Debt Beta Debt-Equity Ratio UAL 1.35 0.27 0.9

AMR has a much lower debt-equity ratio of

0.27

,

which is expected to remain stable, and its debt is risk free. AMR's corporate tax rate is

40

%,

the risk-free rate is

4.8

%,

and the expected return on the market portfolio is

11.2 %

.

a. Estimate AMR's equity cost of capital.