You work in the CFOs office of Alpha Holdings, a corporation that operates in several different lines of business. You are assigned the task of estimating the cost of capital for the retail hardware division in order to evaluate additional investment in that business unit. To compute the divisions cost of capital, you gather the following information.

Your company has 5 million shares of common stock outstanding;

its recently traded share price was $11;

your stocks beta was recently estimated to be 2.7;

your company has 2,000 bonds outstanding valued at $10,000 each with a current yield to maturity of 6%;

your effective corporate tax rate is 21%;

35% of your companys assets are in the retail hardware business.

A company that is only in the retail hardware business has

a stock beta of 1.75;

8,500,000 shares outstanding with a recent trade price of $5.25 per share;

$75,000,000 of long-term debt with a current yield to maturity of 6.1%;

an effective corporate tax rate of 30%.

Currently 10 year Treasury bonds have a yield to maturity of 4.5% and the market risk premium is estimated to be around 4%.

Given the above information, what is your best estimate of the retail hardware divisions cost of capital?