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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?
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.

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