Table 9.1

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.

Debt:The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of

1 percent of the face value would be required in addition to the discount of $40.

Preferred Stock:The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share.

Common Stock:A firm's common stock is currently selling for $12 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent.

The firm's cost of retained earnings is ________. (See Table 9.1)