Mary Ott Hotels 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
|
6.0%
|
20%
|
|
Preferred stock
|
10.0
|
10
|
|
Common equity
|
13.0
|
70
|
|
Plan B
|
|
|
|
Debt
|
6.5%
|
30%
|
|
Preferred stock
|
10.5
|
10
|
|
Common equity
|
13.5
|
60
|
|
Plan C
|
|
|
|
Debt
|
7.0%
|
40%
|
|
Preferred stock
|
10.7
|
10
|
|
Common equity
|
14.2
|
50
|
|
Plan D
|
|
|
|
Debt
|
9.0%
|
50%
|
|
Preferred stock
|
11.2
|
10
|
|
Common equity
|
16.0
|
40
|
a. Which of the four plans has the lowest weighted average cost of capital? (Round to two places to the right of decimal point.)
b. Briefly discuss the results from Plan C and Plan D, and why one is better than the other.