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		7.0	%		20	%
Preferred stock		14.0			10
Common equity		18.0			70
Plan B
Debt		7.8	%		30	%
Preferred stock		14.8			10
Common equity		19.0			60
Plan C
Debt		8.0	%		40	%
Preferred stock		14.7			10
Common equity		9.5			50
Plan D
Debt		12.0	%		50	%
Preferred stock		15.4			10
Common equity		11.8			40

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 ________%

Answer 1

Plan A:-

	Cost (after tax)	×	Weights	=	WACC
Debt	7% = 0.07	×	20%	=	1.4%
Preferred stock	14% = 0.14	×	10%	=	1.4%
Common stock	18% = 0.18	×	70%	=	12.6%
Total					15.4%

Plan B:-

	Cost (after tax)	×	Weights	=	WACC
Debt	7.8% = 0.078	×	30%	=	2.34%
Preferred stock	14.8% = 0.148	×	10%	=	1.48%
Common stock	19% = 0.19	×	60%	=	11.4%
Total					15.22%

Plan C:-

	Cost (after tax)	×	Weights	=	WACC
Debt	8% = 0.08	×	40%	=	3.2%
Preferred stock	14.7% = 0.147	×	10%	=	1.47%
Common stock	9.5% = 0.095	×	50%	=	4.75%
Total					9.42%

Plan D:-

	Cost (after tax)	×	Weights	=	WACC
Debt	12% = 0.12	×	50%	=	6%
Preferred stock	15.4% = 0.154	×	10%	=	1.54%
Common stock	11.8% = 0.118	×	40%	=	4.72%
Total					12.26%

Plan A	15.40%
Plan B	15.22%
Plan C	9.42%
Plan D	12.26%