# Finance and Par Value

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Finance and Par Value
Chapter 14

1. Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for \$410 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 current owners have no debt financing but Templeton plans to borrow \$320 million and invest only \$90 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition? 2. In August of 2009 the capital structure of the Emerson Electric Corporation (EMR) (measure in book and market values) appeared as follows:
Thousands of dollars Book Values Market values
Short- term debt \$1,312,000 \$1,312,000
Long-term debt 11,880,000 11,880,000
Common equity 9,142,000 26,115,000
Total capital 22,334,000 39,307,000

What weights should Emerson use when computing the firm’s weighted average cost of capital?

3. Compute the cost of capital for the firm for the following: a. A bond that has a \$1,000 par value and a contract or coupon interest rate of 11.3%. The bonds have a current market value of \$1,128 and will mature in 10 years. The firm’s marginal tax rate is 34%. b. A new common stock issue that paid a \$1.81 dividend last year. The firm’s dividends are expected to continue to grow at 7.2% per year forever. The price of the firm’s common stock is now \$27.28 c. A preferred stock paying a 8.5% dividend on a \$138 par value. d. A bond selling to yield 11.7% where the firm’s tax rate is 34%. 4. 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 and a contract or coupon interest rate of 11.4%. The bond is currently selling for a price of \$1,122 and will mature in 10 years. The firm’s tax rate is 34%.