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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 | 5.0 | % | 20 | % | ||
Preferred stock | 10.0 | 10 | ||||
Common equity | 14.0 | 70 | ||||
Plan B | ||||||
Debt | 5.8 | % | 30 | % | ||
Preferred stock | 10.8 | 10 | ||||
Common equity | 15.0 | 60 | ||||
Plan C | ||||||
Debt | 6.0 | % | 40 | % | ||
Preferred stock | 11.7 | 10 | ||||
Common equity | 17.8 | 50 | ||||
Plan D | ||||||
Debt | 10.0 | % | 50 | % | ||
Preferred stock | 12.4 | 10 | ||||
Common equity | 19.5 | 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.)
a-2. Which of the four plans has the lowest weighted average cost of capital?
Plan C | |
Plan B | |
Plan A | |
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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