Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $430 million. Since the primary asset of this business is real estate, Templeton’s management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing but Templeton plans to borrow $320 million and invest only $110 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition?

To compute the Weighted Average Cost of Capital (WACC) for the acquisition, Templeton needs to determine the weights of debt and equity. WACC is the average cost of capital for a company, taking into account the proportion of debt and equity used to finance its operations.

In this case, Templeton plans to borrow $320 million and invest $110 million in equity. Therefore, the total capital being invested is:

Total capital = Debt + Equity
Total capital = $320 million + $110 million
Total capital = $430 million

To calculate the weights, divide each component by the total capital:

Weight of Debt = Debt / Total capital
Weight of Debt = $320 million / $430 million
Weight of Debt ≈ 0.744

Weight of Equity = Equity / Total capital
Weight of Equity = $110 million / $430 million
Weight of Equity ≈ 0.256

Therefore, Templeton should use a weight of approximately 0.744 for debt and 0.256 for equity when computing the WACC for this acquisition.