Suppose ABC Company needs to estimate its cost of equity capital and there is only one other firm in its market. Assuming that the rival firm has a different target debte quity ratio, which of the following is a plausible way to estimate ABC Company's cost of equity capital?

1) Use the rival's cost of equity capital directly

2) Use the rival's all-equity cost of capital and MM Prop II.

3) Use the rival's unlevered beta to estimate ABC Company's levered beta and then use the security market line.