(Defining capital Structure weight) Templeton Extended Care Facilities, Inc is considering the acquisition of a chain of cemeteries for $400 million. Since the primary assets 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 $310 million and invest only $90 million in equity in the acquisition. What weights should Templeton use in computing the WAAC for this acquisition?
(Individual or component costs of capital) Compute the cost of capital for the firm for the following:
a. A bond that has a $1,000 par value (face value) and a contract or a coupon interest rate of 10.8%. The bond is currently selling for a price of $1,129 and will mature in10 years. The firm’s tax rate is 34%.
b. A new common stock issue that paid $1.76 dividend last year. The par value of the stock is $14 and the firm’s dividends per share have grown at a rate of 7.2% per year. The growth rate is expected to continue in the foreseeable future. The price of the stock now is $27.52.
c. A preferred stock paying a 8.9% dividend on $132 par value. The preferred shares are currently selling for $154.27.
d. A bond selling to yield 11.7% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%.
(Defining capital Structure weight) Templeton Extended Care Facilities, Inc is considering the acquisition of a chain of cemeteries for $380 million. Since the primary assets 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 $270 million and invest only $110 million in equity in the acquisition. What weights should Templeton use in computing the WAAC for this acquisition?
(Individual or component costs of capital) Compute the cost of capital for the firm for the following:
a. A bond that has a $1,000 par value (face value) and a contract or a coupon interest rate of 11.4%. The bond is currently selling for a price of $1,128 and will mature in10 years. The firm’s tax rate is 34%.
b. A new common stock issue that paid $1.83 dividend last year. The firm’s dividends per share have grown at a rate of 7.2% per year. The growth rate is expected to continue in the foreseeable future. The price of the stock now is $27.04.
c. A preferred stock paying a 8.4% dividend on $114 par value.
d. A bond selling to yield 12.5% where the firm’s tax rate is 34%.
(Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following:
a. A bond that has a $1,000 par value (face value) and a contract or a coupon interest rate of 12.7%. The bond is currently selling for a price of $1,130 and will mature in10 years. The firm’s tax rate is 34%.
b.If the firm’s bonds are not frequently traded, how would you go about determining a cost of debt for this company?
c. A new common stock issue that paid $1.77 dividend last year. The par value of the stock is $15, and the firm’s dividends per share have grown at a rate of 8.2% per year. The growth rate is expected to continue in the foreseeable future. The price of the stock now is $27.06.
d. A preferred stock paying a 10.9% dividend on a $122 par value. The preferred shares are currently selling for $146.21.
e. A bond selling to yield 12.3% where the firm’s tax rate is 34%.
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