Sauer Milk Inc. wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans:
(aftertax)Weights Plan A Debt 6.0% 25% Preferred stock 12.0 15 Common equity 16.0 60 Plan B Debt 6.6% 35% Preferred stock 12.6 15 Common equity 17.0 50 Plan C Debt 7.0% 45% Preferred stock 19.7 15 Common equity 15.5 40 Plan D Debt 17.0% 55% Preferred stock 20.4 15 Common equity 17.6 30
a-1. Compute the weighted average cost for four plans. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
Weighted Cost Plan A % Plan B % Plan C % Plan D %
a-2. Which of the four plans has the lowest weighted average cost of capital? Plan APlan BPlan CPlan D
b. What is the relationship between the various types of financing costs and the debt-to-equity ratio? All types of financing costs increase as the debt-to-equity ratio increases.All types of financing costs decrease as the debt-to-equity ratio increases.