(Defining capital structure weights) In August 2015 the capital structure of the

Question

(Defining capital structure weights) In August 2015 the capital structure of the Emerson Electric Corporation (EMR) (measured in book and market values) was as follows ($ Millions) Short-term debt Long-term debt Common equity Total capital Book Value $2,547 4,386 8,156 Market Value $2,547 4,386 35,736 $42,669 $15,089 What weights should Emerson use when computing the firm's weighted average cost of capital? The appropriate weight of debt, wa, is %. (Round to one decimal place.) The appropriate weight of common equity, wes, is % (Round to one decimal place.)

Explanation / Answer

a. The appropriate weight of debt 16.2% b. The appropriate weight of common equity 83.8% Working: Weights are calculated on the basis of Market Value. 1) Market Value Short-term debt $          2,547 Long-term debt $          4,386 Total Value of debt $          6,933 2) Weight of debt = Market Value of debt/Market Value of Total Capital = $       6,933 / $       42,669 = 16.2% 3) Weight of Equity = Market Value of Equity/Market Value of Total Capital = $     35,736 / $       42,669 = 83.8%

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