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 4.0 % 10 % Preferred stock 8.0 5 Common equity 12.0 85 Plan B Debt 4.2 % 20 % Preferred stock 8.2 5 Common equity 13.0 75 Plan C Debt 5.0 % 30 % Preferred stock 10.7 5 Common equity 9.6 65 Plan D Debt 13.0 % 40 % Preferred stock 11.6 5 Common equity 11.6 55 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.)

Answer 1

PLAN A

WACC = 4(0.1) + 8(0.05) + 12(0.85) = 11%

PLAN B

WACC = 4.2(0.2) + 8.2(0.05) + 13(0.75) = 11%

PLAN C

WACC = 5(0.3) + 10.7(0.05) + 9.6(0.65) = 8.275%

PLAN D

WACC = 13(0.4) + 11.6(0.05) + 11.6(0.55) = 12.16%

Step-by-step explanation:

Weighted average cost of capital is a function of individual cost of capital and their corresponding weights. Thus, we will multiply each cost of capital by the weight of each source.