Question 2. (3 marks) The common stock for the Bestsold Corporation sells for $58. If a new issue is sold, the flotation costs are estimated to be 8 percent. The company pays 50 percent of its earnings in dividends, and a $4 dividend was recently paid. Earnings per share 5 years ago were $5. Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years. The firms marginal tax rate is 21 percent.

a. Calculate the cost of external common equity.

b. Assume Bestsold has a capital structure that consists of $7 million of debt, $2 million of preferred stock, and $11 million of common equity, based upon current market values. The firm's yield to maturity on its bonds is 7.4%, and investors require an 8% return on the firm's preferred and a return on Bestsolds common stock as calculated above (i.e. question a). If the tax rate is 21%, what is Bestsold 's WACC?