Reference no: EM133065050

Question - Mr. Claudio Paoli, Financial Manager of Potenziale Company, is measuring the cost of capital for the company. Mr. Paoli believes the company can issue a series of new bonds at par value of $1,000, with an 8 percent coupon rate and maturity of 10 years to be sold at $1,000 per bond. In addition, the company can issue $2.5 per share dividend preferred stock at $25 price per share. The stock of Potenziale is currently traded for $20.00 per share at the Stock Exchange.

The last dividend paid by the company was $1.43 per share.  Most investors and Mr. Paoli believe that the company can grow at a constant rate of 5 percent per year in the future. The Marginal tax rate of Potenziale is 35 percent.

What is the WACC of Potenziale, if the company considers a capital structure of 50 percent common stock, 5 percent preferred stock, and 45 percent of debt in the form of bond.

What would be the WACC of the company if Potenziale used a capital structure of 65 percent common stock, 5 percent preferred stock, and 30 percent debt in the form of bond.

Required - Calculate WACC for both capital structures. Please describe, in writing, how do you calculate them.

Which capital structure do you prefer? Why? Explain clearly.