Rangoon Enterprises Ltd$.($Rangoon$,$ hereafter$)$ is a manufacturer of basic chemicals. It sells

chemicals to the agricultural industry, such as pesticides, fungicides and so on$.$ Rangoon sees

an opportunity, i$.$e$.,$ a new project, in integrating forward into the manufacture of fertilizers.

As part of the capital budgeting exercise, the CFO is estimating the cost of capital for the

project. Rangoon currently has a beta of equity of $1\mathrm{.}20,$ a debt: equity ratio of $1$:$1,$ and borrows

funds from the market at $11\%$ per annum, in line with its credit rating. The company faces a

marginal tax rate of $40\%.$

As a first step in estimating the cost of capital for the new project, the CFO comes up with the

following estimates of data that he thinks may be relevant for three enterprises that sell

products similar to what Rangoon would sell. Those enterprises also have a similar scale of

manufacturing capacity, sales and marketing strategy and customer profile to Rangoon's.

The data are presented in the table below.

$[1]$: Estimated based on daily stock prices reported on BSE for the past two years

$[2]$: Obtained from the most recent annual reports of the respective companies. Stated in Rs$.$

Crores

$[3]$: Equity Market Capitalization$-$ calculated based on the most recent closing price of the

equity share price of each of the companies, quoted on BSE. Stated in Rs$.$ Crores

In addition, the CFO finds out that the relevant risk$-$free rate $($from Government of India

bonds$)$ is $7\%$ a year. The rate of return on the broad$-$based equity market, as measured by the

return on the BSE Index, is $14\%.$

At a recent meeting where the Board of Directors of Rangoon approved the fertilizer project,

the debt$-$to$-$asset ratio was laid down as $0\mathrm{.}55.$ Calculate the cost of capital that the CFO should

use for the project.