1) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries owned by the Rosewood Corporation 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 Rosewood Corporation has no debt financing, but Templeton plans to borrow $110 million and invest only $300 million in equity in the acquisition. What weights should Templeton use for debt and equity in computing the WACC for this acquisition?

A - Debt weight = 35.7%, equity weight = 64.3%

B - Debt weight = 21.1%, equity weight = 78.9%

C - Debt weight = 26.8%, equity weight = 73.2%

D - Debt weight = 31.4%, equity weight = 68.6%

2) You are working as a finance manager to the TWU Athletic Clothing Company, and you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the target mix of financing sources of the firm's current capital structure as follows: $300,000 bonds, $200,000 preferred stock, and $500,000 common stock.

To finance the purchase, TWU Athletic will sell 20-year bonds with a $1,000 par value paying 6.0 percent per year (with interest paid semiannually) at the market price of $1,020.

Preferred stock paying a $2.50 dividend can be sold for $35.00.

Common stock for TWU Athletic is currently selling for $50.00 per share. The firm paid a $4.00 dividend last year and expects dividends to continue growing at a rate of 4.0 percent per year for the indefinite future. (Assume no flotation cost.)

The firm's tax rate is 34 percent.

What discount rate (WACC) should you use to evaluate the warehouse project?

A - 9.98%

B - 8.74%

C - 6.54%

D - 7.41%