(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 compute the appropriate weights for Templeton's WACC (Weighted Average Cost of Capital) for the acquisition, we need to determine the weights of debt and equity in the capital structure.
The weight of debt (w^d) represents the proportion of the total capital structure financed by debt, while the weight of equity (w^cs) represents the proportion financed by equity.
In this case, Templeton plans to borrow $300 million and invest only $100 million in equity. To calculate the weights, we need to divide the amount of debt and equity by the total capital structure.
Total capital structure = Debt + Equity = $300 million + $100 million = $400 million
Debt weight (w^d) = Debt / Total capital structure = $300 million / $400 million = 0.75 = 75%
Equity weight (w^cs) = Equity / Total capital structure = $100 million / $400 million = 0.25 = 25%
Therefore, the appropriate weight of debt (w^d) is 75% and the appropriate weight of equity (w^cs) is 25%.