Observed Capital Structures Refer to the observed capital structures given in Ta
ID: 2368285 • Letter: O
Question
Observed Capital Structures Refer to the observed capital structures given in Table 15.3 of the text. What do you notice about the types of industries with respect to their average debt-equity ratios? Are certain types of industries more likely to be highly leveraged than others? What are some possible reasons for this observed segmentation? Do the operating results and tax history of the firms play a role? How about their future earnings prospects? Explain. (Your answer should be in no more than 200 words.) TABLE 15.3 Capital Structure Ratios for Selected U.S. Nonfinancial Industries (SIC codes in parentheses) Source: Ibbotson Associates 2008, Cost of Capital Quarterly, 2008 Yearbook Debt as a percentage of the Market Value Equity and Debt (Industrial Media, %) High Leverage Air transport (451) 57.91 Building construction (15) 40.38 Communications (48) 33.57 Hotels and lodging (701) 44.16 Paper (26) 25.06 Low Leverage Biological products (2836) 5.89 Computers (3571) 1.60 Drugs (283) 6.76 Educational services (82) 7.81 Electronics (367) 3.29 Definition: Debt is the total of short-term debt and long-term debt. Values are industry medians of five-year averages.Explanation / Answer
The more capital intensive industries, such as airlines, cable television, and electric utilities, tend to use greater financial leverage. Also, industries with less predictable future earnings, such as computers or drugs, tend to use less financial leverage. Such industries also have a higher concentration of growth and startup firms. Overall, the general tendency is for firms with identifiable, tangible assets and relatively more predictable future earnings to use more debt financing. These are typically the firms with the greatest need for external financing and the greatest likelihood of benefiting from the interest tax shelter.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.