The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGees current capital structure calls for 35 percent debt, 25 percent preferred stock, and 40 percent common equity. Initially, common equity will be in the form of retained earnings (K_e) and then new common stock (K_n). The costs of the various sources of financing are as follows: debt (after-tax), 7.0 percent; preferred stock, 8.0 percent; retained earnings, 14.0 percent; and new common stock, 15.4 percent.

a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, K_e