Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate is 34%. The firm can issue the following...

Southern Corporation has a capital structure of 40% debt and 60% common equity.  This capital structure is expected not to change.  The firm's tax rate is 34%.  The firm can issue the following securities to finance capital investments:

Debt: Capital can be raised through bank loans at a pretax cost of 8.5%.  Also, bonds can be issued at a pretax cost of 10%.

Common Stock: Retained earnings will be available for investment.  In addition, new common stock can be issued at the market price of $59.  Flotation costs will be $3 per share.  The recent common stock dividend was $3.15.  Dividends are expected to grow at 7% in the future.

What is the cost of capital if the firm uses bank loans and retained earnings?