The Gravity Spectrum uses a combination of common stock, preferred stock, and debt financing. The company wants preferred stock to represent 8 percent of the total financing. It also wants to structure the firm in a manner that will produce a weighted average cost of capital of 7.9 percent. The aftertax cost of debt is 5 percent, the cost of preferred is 8.7 percent, and the cost of common stock is 11 percent. What percentage of the firm's capital funding should be debt financing?
The Gravity Spectrum uses a combination of common stock, preferred stock, and debt financing. The company wants preferred stock to represent 8 percent of the total financing. It also wants to structure the firm in a manner that will produce a weighted average cost of capital of 7.9 percent. The aftertax cost of debt is 5 percent, the cost of preferred is 8.7 percent, and the cost of common stock is 11 percent. What percentage of the firm's capital funding should be debt financing?
Related questions
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 | 6.0 | % | 15 | % | ||
| Preferred stock | 12.0 | 10 | ||||
| Common equity | 16.0 | 75 | ||||
| Plan B | ||||||
| Debt | 6.5 | % | 25 | % | ||
| Preferred stock | 12.5 | 10 | ||||
| Common equity | 17.0 | 65 | ||||
| Plan C | ||||||
| Debt | 7.0 | % | 35 | % | ||
| Preferred stock | 12.7 | 10 | ||||
| Common equity | 9.8 | 55 | ||||
| Plan D | ||||||
| Debt | 9.0 | % | 45 | % | ||
| Preferred stock | 13.2 | 10 | ||||
| Common equity | 11.5 | 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.)
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. 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. |
