1. Guzman Enterprises hired you to estimate their cost of capital. The companys target capital structure is equally split between debt and common equity, but no preferred equity. Guzmans outstanding bonds are currently selling for $676.86, have original maturity of 20 years, effective maturity of 9 years, par value of $1,000 and an annual coupon of 4%. Guzman informs you that they do not intend to issue new shares of common equity, and they have no preferred methods for calculating the cost of retained earnings. However, they do provide you with the following information: The company expects dividend growth of 3.5% forever. The common shares will pay a dividend of $1.90 at year end, and the shares currently trade for $22.35 each. Also, the companys common stock is risky enough that it commands a premium of 1.5% over the companys debt. If the firm faces a flat state-plus-federal tax rate of 25%, what is Guzmans cost of capital?