Sauer Milk Inc. wants to determine the minimum cost of capital point

Sauer Milk Inc. wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans:

 Cost

(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.

Here’s the SOLUTION

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