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

Question

Sauer Milk, Inc., wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans:

Compute the weighted average cost for four plans. (Round your intermediate and final answers to 2 decimal places. Omit the "%" sign in your response.)

Cost
(aftertax) Weights   Plan A   Debt 6.0 % 25 %   Preferred stock 12.0 15   Common equity 16.0 60   Plan B   Debt 6.6 % 35 %   Preferred stock 12.6 15   Common equity 17.0 50   Plan C   Debt 7.0 % 45 %   Preferred stock 19.7 15   Common equity 15.5 40   Plan D   Debt 17.0 % 55 %   Preferred stock 20.4 15   Common equity 17.6 30 (a-1)

Compute the weighted average cost for four plans. (Round your intermediate and final answers to 2 decimal places. Omit the "%" sign in your response.)

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? Plan A Plan B Plan C Plan D (b) Among Plan C and Plan D, which has higher weighted average cost of capital. Plan C Plan D

Explanation / Answer

a-1)

a-2 Plan C

b) Plan D

Weights Cost (aftertax) Weighted cost   Plan A 12.90%   Debt 6.00% 25%   Preferred stock 12.00% 15%   Common equity 16.00% 60%   Plan B 12.70%   Debt 6.60% 35%   Preferred stock 12.60% 15%   Common equity 17.00% 50%   Plan C 12.31%   Debt 7.00% 45%   Preferred stock 19.70% 15%   Common equity 15.50% 40%   Plan D 17.69%   Debt 17.00% 55%   Preferred stock 20.40% 15%   Common equity 17.60% 30%

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