Question
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
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)WeightsPlan ADebt6.0%25%Preferred stock12.015Common equity16.060Plan BDebt6.6%35%Preferred stock12.615Common equity17.050Plan CDebt7.0%45%Preferred stock19.715Common equity15.540Plan DDebt17.0%55%Preferred stock20.415Common equity17.630
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 CostPlan 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.
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