Two companies can be picked anyhow (e.g. Google, Yahoo, Microsoft, etc). Thank y

Question

Two companies can be picked anyhow (e.g. Google, Yahoo, Microsoft, etc).

Thank you.

Pick two companies of your choice. Make sure your first company has a debt-to-value (D/V) ratio lower than 20% and the second company has a D/V ratio greater than 80%. Refer to the companies' 2014 annual reports (10-K) to calculate the D/V ratios. Write down the total liabilities, total assets, and the D/V ratio for your two companies at the end of 2014. Come up with one reason for the difference in D/V ratios between your two firms in each of the following value implications of debt. If you don't find hard evidence, speculation would be good enough. Taxes Financial distress Agency costs of leverage Agency benefits of leverage If some of the value channels seem to work in the opposite direction, explain why.

Explanation / Answer

Answer:a Microsoft: Total Asset=174,848,000

Total Liabilities=82,969,000  

D/V ratio=18,260,000 /91,879,000 =0.1987

Yahoo:

Total Asset=61,960,344

Total Liabilities=23,218,507

D/V ratio=1,170,423 /38,741,837=0.03021

Answer:b Interest cost are in Microsoft but not in yahoo so there is financial distress.

Income tax burden also high in microsoft as compared to yahoo.

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