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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)
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 | 7.0 | % | 20 | % | ||
Preferred stock | 14.0 | 10 | ||||
Common equity | 18.0 | 70 | ||||
Plan B | ||||||
Debt | 7.2 | % | 30 | % | ||
Preferred stock | 14.2 | 10 | ||||
Common equity | 19.0 | 60 | ||||
Plan C | ||||||
Debt | 8.0 | % | 40 | % | ||
Preferred stock | 13.7 | 10 | ||||
Common equity | 15.9 | 50 | ||||
Plan D | ||||||
Debt | 12.0 | % | 50 | % | ||
Preferred stock | 14.6 | 10 | ||||
Common equity | 16.8 | 40 | ||||
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? | ||||||||
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b. | What is the relationship between the various types of financing costs and the debt-to-equity ratio? | ||||
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