Evans Technology has the following capital structure.

Debt	25%
Common equity	75

The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent.

1. What is the firms weighted average cost of capital?

Debt

Common Equity

Weighted average cost of capital

An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity.

Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent.

1. Recalculate the firm's weighted average cost of capital.

Debt

Common Equity

Weighted average cost of capital

Which plan is optimal in terms of minimizing the weighted average cost of capital?

Plan B

Plan A