Question

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.