Suppose that Firm A is considering entering a business similar to Firm B, a relatively small firm in a single line of business. Firm A is currently financed with 65% debt and 35% equity. Firm B, the pure-play firm, has a of 0.85 and is financed with 45% debt and 55% equity. Firm Bs marginal tax rate is 34% and Firm As marginal tax rate is 39%. If the riskless rate is 3% and the market return is 8%, estimate firm As cost of equity for the new business using the CAPM.

(Check Answer: Firm As Cost of Equity = 8.89%)