Your company is considering opening a new restaurant division. To determine the weighted average cost of capital for your restaurant division you check comparable firms in the same sector with similar risk. A comparable firm, SBX, has been selected. It is a levered company with the following capital structure. Assume perfect capital markets.

	Weight	Cost of capital
Debt (D)	20%	3.50%
Equity (E)	80%	10.00%

1.What is the unlevered cost of capital of SBX?

2.Your restaurant division is planning to have a higher debt-equity ratio of D/E = 1.0. Because of higher credit risk, the debt cost of capital is 3.7%. Calculate the equity cost of capital for your division.