Paramour Industries has been using 10% as its cost of retained earnings for a number of years. Management has decided to revisit this decision based on recent changes in financial markets. An average stock is currently earning 8%, treasury bills yield 3.5%, and shares of Paramour's stock are selling for $29.18. The firm just paid a dividend of $1.50, and anticipates growing at 5% for the foreseeable future. Paramour's CFO recently asked an investment banker about issuing bonds and was told the market was demanding a 6.5% coupon rate on similar issues. Paramour stock has a beta of 1.4. The incremental risk premium is 4%. Recommend a cost of retained earnings for Paramour using: