cost of capital point for the firm Assume it is considering the following financ
ID: 2589275 • Letter: C
Question
cost of capital point for the firm Assume it is considering the following financial plans Plan A Debt Preterred stock Common equity Plan B Debt Preferred stock Common equity Plan C Debt Preferred stock Common equity Plan D 60% 12.0 16.0 15% 10 75 6.5% 12.5 17.0 25% 10 65 35% 10 7.0% 12.7 9.8 Preferred stock Common equity 90% 13.2 11.5 45% 10 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) Weighted Cost Plan A Plan B Plan C Plan D a-2. Which of the four plans has the lowest weighted average cost of capital? O Plan A O Plan B O 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 increasesExplanation / Answer
Answer:
Formula for calculating weighted average cost of capital is
Weight of debt * Cost(1-t) + Weight of equity * Its cost + weight of prefferd stock * Its cost
It is already given here that the cost given for debt already takes tax shield in to consideration
Putting the values in the formula
Plan Weighted cost
A 14.10
B 13.925
C 9.11
D 10.545
Answer 2: Plan C has the lowest weighted average cost of capital
Answer B: option A.
All types of financing costs increase on increasing debt to equity ratio. It is because of the increased level of risk to the firm that it increases
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