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?

To compute the weighted average cost of capital (WACC) for the acquisition, Templeton Extended Care Facilities, Inc. needs to determine the weights of debt and equity in its capital structure.

The weight of debt is determined by the proportion of debt financing in the capital structure, while the weight of equity is determined by the proportion of equity financing. In this case, Templeton plans to borrow $300 million and invest $100 million in equity. So the weights can be calculated as follows:

Weight of debt = Total debt / Total capital
Weight of debt = $300 million / ($300 million + $100 million)
Weight of debt = $300 million / $400 million
Weight of debt = 0.75 or 75%

Weight of equity = Total equity / Total capital
Weight of equity = $100 million / ($300 million + $100 million)
Weight of equity = $100 million / $400 million
Weight of equity = 0.25 or 25%

Therefore, Templeton should use a weight of 75% for debt and 25% for equity when computing the WACC for this acquisition.