Assume Emerson Electric
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In August 2015 the capital structure of the Emerson Electric Corporation (EMR) (measured in book and market values) was as follows:
What weights should Emerson use when computing the firm's weighted average cost of capital?
a. The appropriate weight of debt is _____ %. (Round to one decimal place.)
b. The appropriate weight of common equity, is________%. (Round to one decimal place.)
Emerson ventures is considering producing a new line of hanggliders. The company estimataes that variable costs will be $325per unit and fixed costs will be $330,000 per year.a. Emerson has a pricing policy that dictates that a product'sprice must be equal to full cost plus 60%. To calculate full cost,emerson must estimate the # of units it will produce & sel in ayear. Emerson estimates at the beginning of the year that they willsell 1,500 gliders & sets their price accorindingly. What isthe price?b. Right after the beginning of the year, the economy takes a dive& emerson finds that demand for their gliders has fallen.Emerson revises its sales & production estimate to just 1,000gliders for the year. According to the company policy, what pricemust they now set?c. What is likely to happen t othe # of gliders sold if emersonfollows company policy & raises the glider prrice to that inpart b?d. Why is setting price by marking up cost inherently circular fora manufacturing firm?
You have finally saved $10,000 and are ready to make your firstinvestment. You have the three following alternatives for investingthat money:-Capital Cities ABC, Inc. bonds with a par value of $1000, thatpays an 8.75 percent on its par value in interest, sells for$1,314, and matures in 12 years.-Southwest Bancorp preferred stock paying a dividend of $2.50 andselling for $25.50.-Emerson Electric common stock selling for $36.75, with a par valueof $5. The stock recently paid a $1.32 dividend and the firmâsearnings per share has increased from $1.49 to $3.06 in the pastfive years. The firm expects to grow at the same rate for theforeseeable future.Your required rates of return for these investments are 6 percentfor the bond, 7 percent for the preferred stock, and 15 percent forthe common stock. Using this information, answer the followingquestions.a. Calculate the value of each investment based on your requiredrate of return.b. Which investment would you select? Why?c. Assume Emerson Electricâs managers an earnings downturn and aresulting decrease in growth of 3 percent. How does this affectyour answer to parts a and b?d. What are required rates of return would make you indifferent toall three options?
