Problem 11-21 Weighted average cost of capital [LO1]

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		4.0	%		10	%
Preferred stock		8.0			5
Common equity		12.0			85
Plan B
Debt		4.2	%		20	%
Preferred stock		8.2			5
Common equity		13.0			75
Plan C
Debt		5.0	%		30	%
Preferred stock		10.7			5
Common equity		9.6			65
Plan D
Debt		13.0	%		40	%
Preferred stock		11.6			5
Common equity		11.6			55

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 A Plan B Plan C Plan 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.