Templeton extended care facilities is considering the acquisition of a chain of

Question

Templeton extended care facilities 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 the business the current owners have no debt financing but Templeton plans to borrow $300 million and invest only $100 million in equity of the acquisition what weight should Templeton use in computing the WACC for this acquisition. Templeton extended care facilities 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 the business the current owners have no debt financing but Templeton plans to borrow $300 million and invest only $100 million in equity of the acquisition what weight should Templeton use in computing the WACC for this acquisition.

Explanation / Answer

Answer:

Templeton should use the following weights for calculating WACC:

Equity 0.33 (1 million / 3 million)

Debt 0.67 (2 million/ 3 million)

Here, it is assumed although the firm has no debt financing, but as it only invests 1 mllion in equity, the remainder is assumed to be investd in debt.

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