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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