Hatch Corporation's target capital structure is 40% debt, 50% common stock, and 10% preferred stock. Information regarding the company's cost of capital can be summarized as follows:

The company's bonds have a nominal yield to maturity of 7%.

The company's preferred stock sells for $40 a share and pays an annual dividend of $4 a share.

The company's common stock sells for $25 a share and is expected to pay a dividend of $2 a share at the end of the year (i.e., D1 = $2.00). The dividend is expected to grow at a constant rate of 7% a year.

The company has no retained earnings.

The company's tax rate is 40%.

a) What is the companys cost of debt after-tax?