Kentucky Hardware Company $($KHC$)$ is considering an investment project that requires a new machine for producing special toois. This new machine costs $$800,000$ and will be depreciated over five years on a straight$-$line basis toward zero salvage value. KHC paid a consulting company $$50,000$ last year to help them decide whether there is sufficient demand for the special tools. In addition to the investment on the machine, $KHC$ invests $$30,000$ in net working capital. $KHC$ also has estimated the performance of the new machine and believes that the new machine will produce $$450,000$ per year in sales, $$200,000$ per year in cost of goods sold, and $$30,000$ per year in administrative expenses. The company pays $$45,000$ in interest expenses annually and has average tax rate $35\%.$

In order to get an estimate of cost of capital, KHC collect the following information.

Debt: $10,0006\mathrm{.}4\%$ coupon bonds outstanding, $$1,000$ par value, $25$ years to maturity, selling for $110\mathrm{.}69\%$ of par; the bonds make semiannual payments.

Common stock: $,495,000$ shares outstanding, selling for $$63$ per share; the beta is $1\mathrm{.}05$ ; KHC$\text{'}$s most recent dividend was $$2\mathrm{.}73$ per share, and dividends are expected to grow at an annual rate of $5\%$ indefinitely.

Preferred stock: $,35,000$ shares outstanding, selling for $$72$ per share; the preferred stock dividend is $$3\mathrm{.}5$ per share.

Market:

$8\mathrm{.}8\%$ market risk premium and $0\mathrm{.}75\%$ risk$-$free rate.

What is the cost of preferred stock for KHC$?$

a$.3\mathrm{.}24\%$

b$.6\mathrm{.}25\%$

c$.5\mathrm{.}25\%$

d$.4\mathrm{.}86\%$