Templeton Extended Care Facilities, Inc. is considering the acquisition of a chainof cemeteries for $400 million. Because the primary asset of this business is realthe majority of the money needed to buy the business. The current owners haveestate, Templeton's management has determined that they will be able to borrowno debt financing but Templeton plans to borrow $300 million and invest only$100 million in equity ($40 million in Preferred Shared and $60 million inCommon Shares) in the acquisition.Templeton is issuing new common stock at a market price of $27.Dividends last year were $1.45 and are expected to grow at an annualrate of 6% forever.• Templeton is issuing a $1000 par value bond that pays 8% annualinterest and matures in 15 years. Investors are willing to pay $950 forthe bond and Temple faces a tax rate of 35%.The preferred stock of Templeton currently sells for $36 a share andpays $2.50 in dividends annually●What is the Weighted Average Cost of capital?

According to the given question, we are required to compute the weighted average cost of capital.…

Answered: mpleton Extended Care Facilities, Inc.…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The firm Amble is entirely financed by equity. It has 4 million shares and a current share price of $8. It is public knowledge that the firm's current management is inefficient and the firm's share price would be $11 if well managed. Amble's shares are owned entirely by small shareholders. The administrative costs to acquire Amble would be $0.14 million. An acquirer can gain control of the firm and manage it efficiently if they can purchase at least 51% of its shares. Assume the market is semi-strong form efficient. (a) Lawson, an entrepreneur, can secretly buy 5% of Amble's shares at the current market price, then make a public bid for a further 46% of the total number of shares at $11 each. What is Lawson's profit? Will the takeover go ahead? Explain. (b) Assume that Lawson implements the strategy described in part (a). Amble has made a provision that when a potential acquirer reaches a holding of 16% of its shares, all shareholders except the acquirer will be able to buy one new…
Before any new financing, Sammy Ltd. has net income of $250,000 and 200,000 common shares outstanding. Ms. Sammy owns 65% of the shares and therefore has control of the company. Sam is considering two plans for raising $700,000 for expansion. Plan A: Borrow at 5% of capital obtained. Plan B: issue 50,000 common shares at $14 each. Management believes the expansion will generate additional income of $300,000 before interest and taxes. Ltd.’s income tax rate is 25%. Ms. Sammy plans to sell to Jayco Co, her best friend’s company, to raise capital if equity is used. These two have been in business for over 15 years, selling fashion accessories. Required: Analyze the above plans to determine which one will result in a higher net income; show calculations for costs included. Also indicate which is more favorable. Using the calculations done above in part 1, indicate which option is more favorable after calculating Earnings Per Share. Which plan do you think would/should be choosen?…
Velcro Saddles is contemplating the acquisition of Skiers' Airbags Incorporated The values of the two companies as separate entities are $30 million and $15 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $550,000 per year in perpetuity. Velcro Saddles considers offering Skiers' shareholders a 50% holding in Velcro Saddles. The opportunity cost of capital is 10%. a. What is the value of the stock in the merged company held by the original Skiers' shareholders? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. b. What is the cost of the stock alternative? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. c. What is the merger's NPV under the stock offer? Note: A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded…
You are an accountant for Davanzo Company. The president of the company calls you into her office and says, “I want to ask you about two issues. First, we need to sell one of our investments to raise $1 million because I think I have found a better investment. We could sell the bonds of Company X, which are currently worth $1 million even though they have an amortized cost basis of $950,000. But I don’t want to sell them because I like the steady stream of cash flow we get related to interest. Or we could sell the bonds in that dog, Company Z. These bonds are also worth $1 million, but they cost us $1.2 million. I hate to admit we made such a big mistake, and if they can somehow avoid bankruptcy, we may actually recover our investment. And then there’s that loss. I don’t want to report that. Second, I am going to use the $1 million to buy about 20% of the shares of Company M, but I seem to remember that there is some accounting rule that might affect how much we buy. I was also…
The management of Mitchell Labs decided to go private in 2002 by buying all 2.50 million of its outstanding shares at $20.20 per share. By 2006, management had restructured the company by selling off the petroleum research division for $12.00 million, the fiber technology division for $8.50 million, and the synthetic products division for $22 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.20 this year. Investment bankers have contacted the firm and indicated that if it reentered the public market, the 2.50 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 15 times earnings per share. a. What was the initial cost to Mitchell Labs to go private? (Do not round intermediate calculations. Round your answer to 2 decimal places. Enter your answer in…
(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 $90 million and invest only $280 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, is%. (Round to one decimal place.)
John Tye has just been hired as the new corporate finance analyst at I-Ell Enterprises and has received his first assignment. John is to take the $25 million in cash received from a recent divestiture and use part of these proceeds to retire an outstanding $10 million bond issue and the remainder to repurchase common stock. However, the bond issue cannot be retired for another two years. If John can place the funds necessary to retire this $10 million debt into an account earning 6 percent compounded monthly,how much of the $25 million remains to repurchase stock?
Ivanhoe Company is considering these two alternatives for financing the purchase of a fleet of airplanes: 1. 2. Issue 52,500 shares of common stock at $44 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) Issue 10%, 10-year bonds at face value for $2,310,000. It is estimated that the company will earn $809,200 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 92,000 shares of common stock outstanding prior to the new financing. Determine the effect on net income and earnings per share for (a) issuing stock and (b) issuing bonds. Assume the new shares or new bonds will be outstanding for the entire year. (Round earnings per share to 2 decimal places, e.g. 2.66.) O î (a) Plan One Issue Stock $ (b) Plan Two Issue Bonds
Cullumber Company is considering these two alternatives for financing the purchase of a fleet of airplanes. 1. Issue 63,000 shares of common stock at $48 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2. Issue 13%, 15-year bonds at face value for $3,024,000. It is estimated that the company will earn $825,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 40% and has 94,100 shares of common stock outstanding prior to the new financing.Determine the effect on net income and earnings per share for issuing stock and issuing bonds. Assume the new shares or new bonds will be outstanding for the entire year. (Round earnings per share to 2 decimal places, e.g. $2.66.)
Overnight Publishing Company (OPC) has $2.7 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The firm's debt is held by one institution that is willing to sell it back to OPC for $2.7 million. The institution will not charge OPC any transaction costs. Once OPC becomes an all-equity firm, it will remain unlevered forever. If OPC does not retire the debt, the company will use the $2.7 million in cash to buy back some of its stock on the open market. Repurchasing stock also has no transaction costs. The company will generate $1,320,000 of annual earnings before interest and taxes in perpetuity regardless of its capital structure. The firm immediately pays out all earnings as dividends at the end of each year. OPC is subject to a corporate tax rate of 22 percent and the required rate of return on the firm's unlevered equity is 13 percent. The personal tax rate on interest income is 20 percent and there are no…
Sydney Rangers Inc operates remote parking lots near major airports. The board of directors of this family-owned company believes that Sydney Rangers could earn an additional $2 million income before interest and taxes by expanding into new markets. However, the $5 million that the business needs for growth cannot be raised within the family. The directors, who strongly wish to retain family control of the company, must consider issuing securities to outsiders.Sydney Rangers’s Plan 1 is to borrow at 6%. Plan 2 is to issue 100,000 common shares. Plan 3 is to issue 100,000 non-voting, $3.75 preferred shares ( $3.75 is the annual dividend paid on each preferred share).Sydney Rangers currently has net income of $3.5 million and 1 million common shares outstanding. The company’s income tax rate is 25%.Requirements:1. Prepare an analysis to determine which plan will result in the highest earning per common share.2. Recommend one plan to the board of directors. Explain your reasons.

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