Problem:
Ross and Sons Inc. has a target capital structure that cells for 40% debt, 10% preferred stock, and 50% common equity. The firm's current after-tax cost of debt is 6%, and it can sell as much debt as it wiches at this rate. The firm's common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock due to flotation costs. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10% per year.
Required:
Question 1: What is the firm's cost of retained earnings?
Question 2: What is the firm's cost of newly issued common stock?
Note: Please show guided help with steps and answer.