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 6.2 % 35 %

Preferred stock 12.2 15

Common equity 17.0 50

Plan C

Debt 7.0 % 45 %

Preferred stock 11.7 15

Common equity 7.6 40

Plan D

Debt 7.0 % 55 %

Preferred stock 12.6 15

Common equity 9.8 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.)

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.