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Sauer Milk Inc. wants to determine the minimum cost of capital point for the firm....

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Accounting

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 6.0 % 15 %
Preferred stock 12.0 10
Common equity 16.0 75
Plan B
Debt 6.5 % 25 %
Preferred stock 12.5 10
Common equity 17.0 65
Plan C
Debt 7.0 % 35 %
Preferred stock 12.7 10
Common equity 9.8 55
Plan D
Debt 9.0 % 45 %
Preferred stock 13.2 10
Common equity 11.5 45

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.) Plan A:

Plan B:

Plan C:

Plan D:

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.

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