Suppose a medical diagnostic firm has Debt$-$Equity ratio $($D$/$E$)$ of $0\mathrm{.}5.$ The risk free rate is $3\%.$ Company $2,$ which makes similar class of therapeutic drugs, has an equity beta of $2.$ Its D$/$E ratio is $1.$ The market risk premium is $2\%.$ The cost of debt for both firms is $4\%.$ What should be the cost of equity for the diagnostic firm?

Suppose a medical diagnostic firm has Debt$-$Equity ratio $($D$/$E$)$ of $0\mathrm{.}5.$ The risk free rate is $3\%.$ Company $2,$ which makes similar class of therapeutic drugs, has an equity beta of $2.$ Its D$/$E ratio is $1.$ The market risk premium is $2\%.$ The cost of debt for both firms is $4\%.$ What should be the cost of equity for the diagnostic firm?

$6\mathrm{.}25\%$

$4\mathrm{.}25\%$

$7\mathrm{.}25\%$

$5\mathrm{.}25\%$