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Debt can be issued at a yield of 10.6 percent, and the corporate tax rate is 35 percent. Preferred stock will be priced at $74 and pay a dividend of $6.00. The flotation cost on the preferred stock is $5.

a. Compute the aftertax cost of debt. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Aftertax cost of debt______%

b. Compute the aftertax cost of preferred stock. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Aftertax cost of preferred stock________%

c. Based on the facts given above, is the treasurer correct?

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

O All types of financing costs increase as the debt-to-equity ratio increases. O All types of financing costs decrease as the debt-to-equity ratio increases. Hints eBook & ResourcesCost (aftertax) Weights Plan A Debt 8.0% 15% Preferred stock 16.0 10 Common equity 20.0 75 Plan B Debt 8.2% 25% Preferred stock 10.2 10 Common equity 15.0 65 Plan C Debt 9.0% 35% Preferred stock 14.7 10 Common equity 14.5 55 Plan D Debt 11.0% 45% Preferred stock 15.6 10 Common equity 15.8 45