Types of financing costs and debt-to-equity ratio

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Reference no: EM131994100

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 . 3.0 % . 25 %

Preferred stock 6.0 20

Common equity 10.0 55

Plan B

Debt 3.5 % 35 %

Preferred stock 6.5 20

Common equity 11.0 45

Plan C Debt 4.0 % 45 %

Preferred stock 16.7 20

Common equity 11.8 35

Plan D

Debt 1 1.0 % 50 %

Preferred stock 17.2 20

Common equity 13.5 30

-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 C

Plan B

Plan A

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.

Reference no: EM131994100

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