Fat Cat, Inc. (FCI) is a chain of pet supply retail stores. Clumpy Sand, LLC is a kitty litter manufacturer and a supplier to FCI. FCI has an equity beta of 1.38 and is 50% equity-financed (wE). Clumpy Sand has an equity beta of 0.98 and a debt-equity ratio of 0.90. The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent. What discount rate should FCI use as its cost of equity if it considers a project that involves the manufacturing of kitty litter? Assume taxes are 30% and that FCI will maintain its current capital structure for its new kitty litter division.

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