Company Y has the following information on its balance sheet:

Assets

Cash 1,000,000

Accounts Receivable 1,000,000

Inventory 750,000

Current Assets 2,750,000

Net Fixed Assets 8,250,000

Total Assets 11,000,000

Liabilities

Accounts Payable 1,000,000

Notes Payable 1,250,000

Current Liabilities 2,250,000

Long Term Debt 2,500,000

Preferred Stock 1,250,000

Common Stock and Retained Earnings 5,000,000

Total Liabilities + Equity 11,000,000

In order to remain an industry leader, Company Y will need to raise $1.5 million to buy a new computer system. Its current operations are expected to add $500,000 to retained earnings during the coming year. Its current debt is currently valued at par, has a 7% coupon rate, pays interest semiannually, and will mature in 6 years. The common stock is selling in the market at $38 per share, and has 145,000 shares outstanding. The company just paid a common stock dividend of $1.75 per share. The dividends are expected to grow at a constant 5% per year. The current preferred stock (12,500 shares outstanding), carries a dividend of $4.00 per share and is selling in the market for 67.50 per share. The corporate tax rate is 35%. Company Y can sell new common stock at current market price with a flotation cost of 4%, new preferred stock with a dividend of $4.00 per share to sell at $65 per share, and new semiannual coupon bonds with a par value of $1000 with a 20 year maturity and a 9% coupon, to sell at 97.5% of par.

What is the after-tax cost of debt?

What is the after-tax cost of retained earnings?

What percent of new financing must come from equity funds?