Compute the cost of capital for the firm

Reference no: EM13763767

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 firm's 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 firm's 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.

Reference no: EM13763767

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