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 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 borro $290 million and invest only $110 million in equity in the acquisition. What weights should Templeton use in computing WACC for the acquisition? The appropriate wd weight is __%. (Round to one decimal place) did not match with any Answers results.
Your small business needs to buy new office furniture for your new headquarters. You have the option of leasing the furniture, or buying the furniture. You can purchase the furniture for $15,000 per year, or lease the same furniture for $5,000 per year for the next four years.
Your company has a marginal tax rate of 40%. Depreciation will amount to $3,750 per year and the furniture will be replaced after 4 years. If your company buys the furniture, they will borrow at 7%.
Required:
1.Calculate the total cost for both options.
2.Leasing vs. buying: which is the best option for your small business and why?
To determine the weight of debt (wd) for Templeton's acquisition, we need to calculate the proportion of debt financing relative to the total financing.
Templeton plans to borrow $290 million for the acquisition and invest $110 million in equity.
The total financing for the acquisition is the sum of debt and equity:
$total financing = debt + equity$
$total financing = $290 million + $110 million$
$total financing = $400 million$
Now, we can calculate the weight of debt:
$wd = \frac{debt}{total financing}$
$wd = \frac{290}{400}$
$wd = 0.725$
Therefore, the weight of debt (wd) that Templeton should use in computing the Weighted Average Cost of Capital (WACC) for the acquisition is approximately 72.5%.
To compute the weighted average cost of capital (WACC) for the acquisition, Templeton needs to determine the appropriate weights for debt (wd) and equity (we).
In this case, Templeton plans to borrow $290 million and invest $110 million in equity. To calculate the weights, divide the amount of debt and equity by the total capital invested:
wd = Debt / Total Capital
wd = $290 million / ($290 million + $110 million)
we = Equity / Total Capital
we = $110 million / ($290 million + $110 million)
To find the weights, you can solve these equations:
wd = $290 million / $400 million
wd = 0.725 or 72.5%
we = $110 million / $400 million
we = 0.275 or 27.5%
Therefore, the appropriate wd weight for Templeton in computing WACC for the acquisition is 72.5%.