Ross Inc. has a target capital structure that calls for 25% debt, 15% preferred stock and 60% common equity. The company has 25 year maturity, 7% semi-annual coupon bonds outstanding currently selling at $1,105.23. Currently, common and preferred equity in Ross is trading for $22.50 and $104.00, respectively. Ross is a relatively safe investment with a beta of 0.58 and it expects to retain $2.37 million in earnings over the coming year. Also, they are a dividend paying company, having just paid a $1.40 dividend and that is expected to grow at 2% per year; their preferred pays a dividend of 7.25% based on $100 par value. Floatation costs of 8% and 15% would have to be paid to issue new shares of preferred and common stock, respectively. The corporation is taxed at a 28% rate. Investors can invest risk free earning 2%, while investing in the market is expected to earn 14%.

(a) What is the firms cost of debt?

(b) What is the cost of newly issued preferred stock?

(c) What is the firms cost of retained earnings using a dividend discount approach?

(d) Re-answer part (c) using a CAPM approach.

(e) Given your answers to parts (c) and (d), whats rs?