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 . 3.0 % . 25 %
Preferred stock 6.0 20
Common equity 10.0 55
Plan B
Debt 3.5 % 35 %
Preferred stock 6.5 20
Common equity 11.0 45
Plan C Debt 4.0 % 45 %
Preferred stock 16.7 20
Common equity 11.8 35
Plan D
Debt 1 1.0 % 50 %
Preferred stock 17.2 20
Common equity 13.5 30
-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.)
Plan A
Plan B
Plan C
Plan D
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.