J. Ross and Sons, Inc. has a capital structure that calls for 40 percent debt, 10 percent preferred stock, and balance common stock. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for $90 a share and pays a dividend of $10 per share. The firm recently paid a dividend of $2 per share of common stock, and the investors expect the divid end to grow indefinitely at a constant rate of 10 percent per year. The common stock of Ross is currently selling at $40.
a) What is the firm's cost of preferred stock, and common stock?
b) What is the weighted average cost of capital of the firm?