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Locomotive Company is a publicly held company with common stock listed on the New York Stock Exchange and bonds traded over the counter. As of the...

Hi looking for help with solving the attached case.
Compute the cost of capital for the following:
a. Bond (debt)
b. Preferred stock
c. Common equity in the form of retained earnings
d. New common stock
e. Weighted average cost of capital
Locomotive Company is a publicly held company with common stock listed on the New York Stock Exchange and bonds traded over the counter. As of the current balance sheet, it has three bond issues outstanding: $150 million of 10 percent series 2021 $50 million of 7 percent series 2015 $75 million of 5 percent series 2012 The financing managing director of the company is planning to sell $75 million of bonds next year to replace the debt due to expire in 2012. Present market yields on similar Baa-rated bonds are 12.1 percent. Locomotive also has $90 million of 7.5 percent non-callable preferred stock outstanding, and it has no intentions of selling any preferred stock at any point in time in the future. The preferred stock is currently priced at $80 per share, and it dividend per share is $7.80. The company has had very volatile earnings, but its dividends per share have had a very stable growth rate of 8 percent and this will continue. The expected dividend (D 1 ) is $1.90 per share, and the common stock is selling for $40 per share. The company’s investment banker has quoted the following flotation costs to Locomotive: $2.50 per share for preferred stock and $2.20 per share for common stock. On the advice of its investment banker, Locomotive has kept its debt at 50 percent of assets and its equity at 50 percent. Locomotive sees no need to sell either common or preferred stock in the foreseeable future as it has generated enough internal funds for its investment needs when these funds are combined with debt financing. Locomotive’s corporate tax rate is 40 percent.
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Answer
Compute the cost of capital for the following:
a. Bond (debt)
Cost of Bond (Debt) = YTM (1- Tax rate)
= .121(1- .40)
= .0726 or 7.26%
B) Preferred stock
Cost of Preferred Stock = Preference...

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