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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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