Define captital 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, Templetons management has determined that they will be able to borrow the majority of the money needed to buy a 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

Question

Define captital 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, Templetons management has determined that they will be able to borrow the majority of the money needed to buy a 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

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Answer 1

To compute the weighted average cost of capital (WACC) for the acquisition, Templeton needs to determine the weights of debt and equity in their capital structure. The weights are determined by the proportion of debt and equity used to finance the acquisition.

In this case, Templeton plans to borrow $300 million (debt financing) and invest $100 million in equity. Therefore, the weights can be calculated as follows:

Debt Weight = Debt / Total Financing
Debt Weight = $300 million / ($300 million + $100 million)
Debt Weight = $300 million / $400 million
Debt Weight = 0.75 or 75%

Equity Weight = Equity / Total Financing
Equity Weight = $100 million / ($300 million + $100 million)
Equity Weight = $100 million / $400 million
Equity Weight = 0.25 or 25%

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

Answer 2

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

Given that Templeton plans to borrow $300 million and invest $100 million in equity, we can calculate the weights as follows:

Total capital invested = Debt + Equity
Total capital invested = $300 million + $100 million
Total capital invested = $400 million

Weight of debt = Debt / Total capital invested
Weight of debt = $300 million / $400 million
Weight of debt = 0.75 or 75%

Weight of equity = Equity / Total capital invested
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.