A firm raises capital with issuing debt and prefer stocks. It will sell a 15-year bond with 12% coupon rate that will semiannually be paid for $1,200. The firm is about to sell prefer stock that has $100 par value and pays 2.5 % of par value as dividend every quarter. Its current price is set to $12.5 and floatation cost of this issuance is 5%. (tax rate is 40%)
a. Compute cost of debt.