Question

​(Defining capital structure​ weights) Templeton Extended Care​ Facilities, Inc. is considering the acquisition of a chain of cemeteries owned by the Rosewood Corporation for ​$370 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 Rosewood Corporation has no debt​ financing, but Templeton plans to borrow ​$100 million and invest only $ 270 million in equity in the acquisition. What weights should Templeton use for debt and equity in computing the WACC for this​ acquisition?

The appropriate weight of​ debt, w Subscript dwd​, is nothing​%. ​(Round to one decimal​ place.)

Answer 1

Total investment needed = $ 370 millions

Weight of debt = $100 millions

Weight of Equity = $270 millions

Weight of debt for WACC = investment in debt/Total investment

= 100/370

=0.27027027027027 or 27.03%

Weight of Equity for WACC = Investment in equity/Total investment

= 270/370

=0.72972972972972 or 72.97%

So, weight of debt is 27.03% and weight of Equity is 72.97%