Question: 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 % 10 % Preferred stock 10.0 5 Common equity 14.0 85 Plan B Debt 5.6 % 20 % Preferred stock 10.8 5 Common equity 15.0 75 Plan C Debt 6.0 % 30 % Preferred stock 16.7 5 Common equity 12.5 65 Plan D Debt 14.0 % 40 % Preferred stock 17.4 5 Common equity 14.8 55
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 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.
Hints: Referencese Book & Resources Worksheet Difficulty: Intermediate Learning Objective: 11-01 The cost of capital represents the weighted average cost of the source of financing to the firm.