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.)

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.Hints

References

eBook & Resources