Question
In: Finance
Sauer Milk Inc. wants to determine the minimum cost of capital point for the firm. Assume...
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 | 5.0 | % | 20 | % | ||
| Preferred stock | 10.0 | 10 | ||||
| Common equity | 14.0 | 70 | ||||
| Plan B | ||||||
| Debt | 5.2 | % | 30 | % | ||
| Preferred stock | 10.2 | 10 | ||||
| Common equity | 15.0 | 60 | ||||
| Plan C | ||||||
| Debt | 6.0 | % | 40 | % | ||
| Preferred stock | 15.7 | 10 | ||||
| Common equity | 11.6 | 50 | ||||
| Plan D | ||||||
| Debt | 12.0 | % | 50 | % | ||
| Preferred stock | 16.6 | 10 | ||||
| Common equity | 13.6 | 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.)
a-2. Which of the four plans has the lowest
weighted average cost of capital?
-
Plan A
-
Plan B
-
Plan C
-
Plan D
Solutions
jeff jeffy answered 9 months agoRelated Solutions
Sauer Milk Inc. wants to determine the minimum cost of capital point for the firm. Assume...
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 3.0 % 25 %
Preferred stock 6.0 20 Common equity 10.0 55 Plan B Debt 3.5 % 35 %
Preferred stock 6.5 20 Common equity 11.0 45
Question 1. Weighted average cost of capital (LO11-1) Sauer Milk Inc. wants to determine the minimum...
Question 1. Weighted average
cost of capital (LO11-1) 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%
30%
Preferred stock........................................
8.0
15
Common equity........................................
12.0
55
Plan B
Debt........................................
4.5%
40%
Preferred stock........................................
8.5
15
Common equity........................................
13.0
45
Plan C
Debt........................................
5.0%
45%
Preferred stock........................................
18.7
15
Common equity........................................
12.8
40
Plan D
Debt........................................
12.0%
50%
Preferred stock...........................................
COST OF CAPITAL ASSIGNMENT STEPHANIE’S CAJUN FOODS, INC NEEDS TO DETERMINE THEIR COST OF CAPITAL FOR...
COST OF CAPITAL ASSIGNMENT
STEPHANIE’S CAJUN FOODS, INC NEEDS TO DETERMINE THEIR COST OF
CAPITAL FOR CAPITAL BUDGETING PURPOSES. THEY HAVE ASSEMBLED THE
FOLLOWING INFORMATION:
MARKET PRICE OF OUTSTANDING
BONDS
95
COUPON RATE – SEMI-ANNUAL
PAYMENTS
11.0%
MATURITY
VALUE
$ 1,000
YEARS TO
MATURITY
25
FLOTATION
COSTS
2%
CORPORATE TAX
RATE
21%
MARKET PRICE OF OUTSTANDING
PREFERRED
$ 50
PAR
VALUE
$ 25
DIVIDEND...
COST OF CAPITAL ASSIGNMENT STEPHANIE’S CAJUN FOODS, INC NEEDS TO DETERMINE THEIR COST OF CAPITAL FOR...
COST OF CAPITAL ASSIGNMENT
STEPHANIE’S CAJUN FOODS, INC NEEDS TO DETERMINE THEIR COST OF
CAPITAL FOR CAPITAL BUDGETING PURPOSES. THEY HAVE ASSEMBLED THE
FOLLOWING INFORMATION:
MARKET PRICE OF OUTSTANDING
BONDS
95
COUPON RATE – SEMI-ANNUAL
PAYMENTS
11.0%
MATURITY
VALUE
$ 1,000
YEARS TO
MATURITY
25
FLOTATION
COSTS
2%
CORPORATE TAX
RATE
21%
MARKET PRICE OF OUTSTANDING
PREFERRED
$ 50
PAR
VALUE
$ 25
DIVIDEND (PERCENTAGE OF
PAR)
10%...
Why is it important for a firm to know how to determine their cost of capital?
Why is it important for a firm to know how to determine their
cost of capital?
Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A...
Assume firm A wants to borrow float while firm B wants to
borrow fixed. Firm A is offered 10% fixed borrowing cost and LIBOR
+ 0.3% float borrowing cost while firm B is offered 11.2% fixed
borrowing cost and LIBOR + 1% float borrowing cost.
(a) Show how the two firms can reduce their borrowing costs
equally by entering into an interest rate plain vanilla swap? Use a
table to demonstrate your solution
(b) If the agreed-upon notional amount is...
Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A...
Assume firm A wants to borrow float while firm B wants to borrow
fixed. Firm A is offered 10% fixed borrowing cost and LIBOR + 0.3%
float borrowing cost while firm B is offered 11.2% fixed borrowing
cost and LIBOR + 1% float borrowing cost.
Show how the two firms can reduce their borrowing costs
equally by entering into an interest rate
plain vanilla swap? Use a table to
demonstrate your solution
If the agreed-upon notional amount is $100m (no...
Assume firm A wants to borrow float while firm B wants to borrow fixed. Firm A...
Assume firm A wants to borrow float while firm B wants to borrow
fixed. Firm A is offered 10% fixed borrowing cost and LIBOR + 0.3%
float borrowing cost while firm B is offered 11.2% fixed borrowing
cost and LIBOR + 1% float borrowing cost.
(a) Show how the two firms can reduce their borrowing costs
equally by entering into an interest rate plain vanilla swap? Use a
table to demonstrate your solution
(b) If the agreed-upon notional amount is...
Assume that a firm wants to maximise profits, using a diagram (with marginal cost, average total...
Assume that a firm wants to maximise profits, using a diagram
(with marginal cost, average total cost and average variable cost
curves), explain the decisions a firm will make to maximise profits
in the short run and indicate the profit/loss on the diagram when
the price is:
(a) Greater than the minimum average total cost.
(b) Less than the minimum average variable cost.
(c) Less than the minimum average total cost but greater than
the average variable cost.
Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9.5 percent. The...
Phil's Carvings, Inc. wants to have a weighted average cost of
capital of 9.5 percent. The firm has an aftertax cost of debt of
6.5 percent and a cost of equity of 12.75 percent. What debt-equity
ratio is needed for the firm to achieve their targeted weighted
average cost of capital?
a. .67
b. .84
c. .92
d. .76
e. 1.08
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