Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $410 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 $110 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition? The appropriate w d weight is _ %

Question

Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $410 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 $110 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition? The appropriate w d weight is _ %

Answer 1

Templeton Extended Care Facilities, Inc. is considering the

acquisition of a chain of cemetaries for $370 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 planss to borrow $270 million and invest only $100 million in equity
acquisition. What weights should
Templeton use in the computing the WACC for this acquisition?

Answer 2

To determine the weight of debt (w_d), we need to calculate the ratio of debt to the total capital employed by Templeton for the cemetery acquisition.

Total capital employed (TC) = Debt + Equity

Given that Templeton plans to borrow $300 million and invest $110 million in equity, we can calculate the weight of debt as follows:

Debt (D) = $300 million
Equity (E) = $110 million

TC = D + E
TC = $300 million + $110 million
TC = $410 million

w_d = (D / TC) * 100
w_d = ($300 million / $410 million) * 100
w_d = 73.17%

Therefore, Templeton should use a weight of 73.17% for debt (w_d) when computing the Weighted Average Cost of Capital (WACC) for this acquisition.

Answer 3

To determine the appropriate weight to use for debt (w_d) in computing the weighted average cost of capital (WACC), we need to consider the proportion of debt and equity being utilized by Templeton for the acquisition.

In this case, Templeton plans to borrow $300 million and invest $110 million in equity. Therefore, the weight for debt (w_d) can be calculated using the following formula:

w_d = Debt / (Debt + Equity)

Substituting the given values:

w_d = $300 million / ($300 million + $110 million)

w_d = $300 million / $410 million

w_d ≈ 0.7317 (rounded to four decimal places)

Converting the weight to a percentage:

w_d ≈ 73.17%

Therefore, Templeton should use a weight of approximately 73.17% for debt (w_d) when calculating the WACC for this acquisition.