Company ABC is an international conglomerate. It is looking to establish a subsidiary selling unproven homeopathic remedies, having identified a current demand in the market. But, ABC needs to find the cost of equity for the subsidiary. ABC decides that Blackmores is a good comparable firm. After doing some research, ABC finds that blackmore's beta is approximately 0.28. Blackmore's debt/equity ratio is approximately 0.8.

But, you believe the subsidiary can only support a debt/equity ratio of 0.4. Suppose that the corporate tax rate for blackmores is 30%, but you think it would only be 20% for the subsidiary due to its low income. The anticipated risk free rate is 2.5% and the anticipated market risk premium is 5.5%. What is the subsidiary's cost of equity?

a.3.80%

b.4.04%

c.3.76%

d.4.12%

e.4.37%