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

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. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Cost
(aftertax) Weights   Plan A   Debt 8.0 % 25 %   Preferred stock 16.0 15   Common equity 20.0 60   Plan B   Debt 8.8 % 35 %   Preferred stock 16.8 15   Common equity 20.0 50   Plan C   Debt 9.0 % 45 %   Preferred stock 15.7 15   Common equity 10.5 40   Plan D   Debt 13.0 % 55 %   Preferred stock 16.4 15   Common equity 12.8 30

Explanation / Answer

Cost Weighted (aftertax) Weights Cost   Plan A   Debt 8.0% 25% 2.00%   Preferred stock 16.0% 15% 2.40%   Common equity 20.0% 60% 12.00% Total 16.40%   Plan B   Debt 8.8% 35% 3.08%   Preferred stock 16.8% 15% 2.52%   Common equity 20.0% 50% 10.00% Total 15.60%   Plan C   Debt 9.0% 45% 4.05%   Preferred stock 15.7% 15% 2.36%   Common equity 10.5% 40% 4.20% Total 10.61%   Plan D   Debt 13.0% 55% 7.15%   Preferred stock 16.4% 15% 2.46%   Common equity 12.8% 30% 3.84% Total 13.45% a1. Weighted Cost   Plan A 16.40%   Plan B 15.60%   Plan C 10.61%   Plan D 13.45% a2. Plan C has lowest WACC b As debt to equity ratio increases , the finance costs decreases. The second statement is true.

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