(Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $400 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 $300 million and invest only $100 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition? The appropriate w^d weight is ___ % (round to one decimal place). The appropriate w^cs weight is ____% (round to one decimal place).
To calculate the weights for Templeton's capital structure, we need to determine the proportion of debt and equity used in the acquisition. The weight of debt (w^d) represents the proportion of debt used, and the weight of equity (w^cs) represents the proportion of equity used.
In this case, Templeton plans to borrow $300 million and invest $100 million in equity. Therefore, the weight of debt (w^d) can be calculated by dividing the amount of debt ($300 million) by the total capital invested ($300 million + $100 million):
w^d = Debt / (Debt + Equity) = $300 million / ($300 million + $100 million)
w^d = $300 million / $400 million = 0.75, or 75%
Similarly, the weight of equity (w^cs) can be calculated by dividing the amount of equity ($100 million) by the total capital invested ($300 million + $100 million):
w^cs = Equity / (Debt + Equity) = $100 million / ($300 million + $100 million)
w^cs = $100 million / $400 million = 0.25, or 25%
Therefore, the appropriate w^d weight is 75% and the appropriate w^cs weight is 25%.