Hanover Inc. has a target capital structure consisting of 30 percent debt, 10 percent preferred stock, and 60 percent common equity. Its bonds have a maturity of $1,000. a 10 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock that pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Hanover's beta is 1.2, the risk-free rate is 8 percent, and the market risk premium is 5 percent. Hanover is a constant growth firm that just paid a dividend of $2.50, sells for $26.00 per share, and has a growth rate of 9 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find r_s. Flotation costs on new common stock total 10 percent and the firm's marginal tax rate is 40 percent What is Hanover's cost of retained earnings using the CAPM approach