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).
13.1
To determine the weights for computing the weighted average cost of capital (WACC) for Templeton Extended Care Facilities, Inc.'s acquisition, we need to calculate the weight of debt (w^d) and the weight of equity (w^cs).
The weight of debt (w^d) is the proportion of debt in the total capital structure, and the weight of equity (w^cs) is the proportion of equity in the capital structure.
In this case, Templeton plans to borrow $300 million and invest only $100 million in equity. So, the total capital structure is $300 million (debt) + $100 million (equity) = $400 million.
To calculate the weight of debt (w^d):
w^d = (Debt / Total Capital) x 100
w^d = ($300 million / $400 million) x 100
w^d = 0.75 x 100
w^d = 75%
Therefore, the appropriate weight of debt (w^d) for Templeton should be 75% (rounded to one decimal place).
To calculate the weight of equity (w^cs):
w^cs = (Equity / Total Capital) x 100
w^cs = ($100 million / $400 million) x 100
w^cs = 0.25 x 100
w^cs = 25%
Therefore, the appropriate weight of equity (w^cs) for Templeton should be 25% (rounded to one decimal place).
In summary, the appropriate w^d weight is 75%, and the appropriate w^cs weight is 25%.