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Mary Ott Hotels 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%
20%
Preferred stock
10.0
10
Common equity
13.0
70
Plan B
6.5%
30%
10.5
13.5
60
Plan C
7.0%
40%
10.7
14.2
50
Plan D
9.0%
50%
11.2
16.0
40
a. Which of the four plans has the lowest weighted average cost of capital? (Round to two places to the right of decimal point.)
b. Briefly discuss the results from Plan C and Plan D, and why one is better than the other.
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