Mr. Alessandro Nesta, Financial Manager of Potenza Company, is measuring the cost of capital for the company. Mr. Nesta believes the company can issue a series of new bonds at par value of $1,000, with 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 Potenza is currently traded for $20.00 per share at the Turin Stock Exchange. The last dividend paid by the company was $1.43 per share. Most investors, as well as Mr. Nesta, believe that the company can grow at a constant rate of 5 percent per year in the future. The Marginal tax rate of Potenza is 35 percent.
What is the WACC of Potenza, if the company considers a capital structure of 50 percent common stock, 5 percent preferred stock, and 45 percent of debt in form of bond.
What would be WACC of the company, if Potenza used a capital structure of 65 percent common stock, 5 percent preferred stock, and 30 percent debt in 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?