DoPharm is evaluating a takeover of Phaneuf Accelerator Inc. (PAI) by using the FCF and FCFE valuation approaches. DoPharm has collected the following information for the current year: PAI has sales of $1,000 million with 40% operating margin, depreciation of $90 million, capital expenditures of $170 million, and an increase in working capital of $40 million. Interest expenses are $50 million. The current market value of PAIs outstanding debt is $1,500 million. The company has retired the existing bonds for $10 million. FCF and FCFE are expected to grow at 10% for the next five years and 6% after that. The tax rate is 30%. PAI financed with 40% debt and 60% equity. Its before-tax cost of debt is 9%, and its cost of equity is 13%. The number of shares outstanding is 100 million.

1. Estimate cost of capital of PAI in %.