How to calculate the cost of debt

5. Beta. Piccolo Ltd is trying to estimate a cost of capital to use in assessing its entry into the marble benchtop market. The publicly traded firms in this market have an average beta of 1.4 and an average D/E ratio of 0.8. There is intense competition within the industry for business. Piccolo itself carries a D/E ratio of only 0.5 with a cost of debt that is equal to the risk-free rate levered up by the firm's debt beta. Piccolo plans to maintain this D/E ratio on its new venture. The risk free rate is 5 percent and the required return on the market is 12 percent. The tax rate for all firms is 25 percent