FIN 370 Week 2 MyFinanceLab
1). Templeton
Extended Care Facilities, Inc is considering the acquisition of a chain of
cemeteries for $390 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 $280 million and invest only
$110 million in equity in the acquisition. What weights should Templeton use in
computing the WAAC for this acquisition?
a). The appropriate (W d) weight is _?
b). The appropriate (W cs) weight is _?
2). 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 coupon interest rate of 11.2%. The bonds have a current market
value of $1,127 and will mature in 10 years. The form’s marginal tax rate is
34%.
b). A new common stock issue that paid a $1.76 dividend last
year. The firm’s dividends are expected to continue to grow at 7.5% per year
forever. The price of the firm’s common stock is now $27.27.
c). A preferred stock paying a 9.9% dividend on a $150 par
value.
d). A bond selling to yield 12.5% where the form’s tax rate
is 34%.
3). 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 coupon interest rate of 12.2%. the bonds have a current market
value of $1,127 and will mature in 10 years. The firm’s tax rate is 34%.
b. If the firmΓ’ΒΒs bonds are not frequently traded, how would
you go about determining a cost of debt for this company?
c. It is standard practice to estimate the cost of debt
using the yield to maturity on a portfolio of bonds with a similar credit
rating and maturity as the firmΓ’ΒΒs outstanding debt.
d). A preferred stock paying a 10.4% dividend on a $126 par
value. The preferred shares are currently selling for $150.92.
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