Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $400 million. Because 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 current owners have no debt financing but Templeton plans to borrow $300 million and invest only $100 million in equity ($40 million in Preferred Shared and $60 million in Common 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 annual rate of 6% forever.Templeton is issuing a $1000 par value bond that pays 8% annual interest and matures in 15 years. Investors are willing to pay $950 for the bond and Temple faces a tax rate of 35%.The preferred stock of Templeton currently sells for $36 a share and pays $2.50 in dividends annually What is the Weighted Average Cost of capital?

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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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Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $400 million. Because 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 current owners have no debt financing but Templeton plans to borrow $300 million and invest only $100 million in equity ($40 million in Preferred Shared and $60 million in Common 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 annual rate of 6% forever.
Templeton is issuing a $1000 par value bond that pays 8% annual interest and matures in 15 years. Investors are willing to pay $950 for the bond and Temple faces a tax rate of 35%.
The preferred stock of Templeton currently sells for $36 a share and pays $2.50 in dividends annually

What is the Weighted Average Cost of capital?

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