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) Book Value Market Value ​ Short-term debt ​ $2 comma 600 ​$2 comma 600 ​ Long-term debt 4 comma 246 4 comma 246 Common equity Modifying 8 comma 051 with underline Modifying 35 comma 711 with underline Total capital Modifying $ 14 comma 897 with double underline Modifying $ 42 comma 557 with double underline What weights should Emerson use when computing the​ firm's weighted average cost of​ capital?

Answer 1

0.1609 and 0.8391

Step-by-step explanation:

The computation of the weight required to compute the firm's weighted average cost of​ capital is shown below:

For Weight of debt

= (Short-term debt + Long-term debt) ÷ (Total Capital )

= ($2,600 + $4,246) ÷ ($42,557)

= 0.1609

For weight of equity

= Common Equity ÷ Total Capital

= $35,711 ÷ $42,557

= 0.8391

We simply divide the debt with its total capital so that the weight of capital structure could arrive