Finance Mba 645

6.1 Refer to observed capital structures given in Table 16.7 of the text (p. 547). 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

The text states “Debt is the book value of preferred stock and long-term debt, including amounts due in one year” (Ross 547). When I look at the industries that are in the chart I see that there are many different debt equity ratios. As we have learned in this chapter “When it comes to capital structure, all companies (and industries) are not created equal” (Ross 548). In the U.S. many industries have low debt equity ratios it is said that most have relatively debt equity ratios (Ross 547). The formula for debt equity ratio is Debt-to-Equity Ratio = total liabilities/shareholders’ equity. Having Lower values of debt-to-equity ratio indicates less risk for a company whereas higher debt-to equity ratio tend to mean a company needs more external shareholders. When a company has a higher debt-to equity ratio the risks are higher leading to higher interest rates. Now I would say that the popularity of the products/services rendered by the company has a large role to play in the company’s debt-to equity ratio. If business is not good the company would the profit margin would be low meaning the company would need some shareholders to help bail the company out of there debt. Another reason would be if the company is trying to out sale its competition by lowering their prices and again losing their profits.

Bibliography

Stephen, Randolph Westerfield, Bradford Jordan. Fundamentals of Corporate Finance Standard Edition, 10th Edition. McGraw-Hill Learning Solutions, 01/2012.

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6.2 Suppose your boss comes to you and asks you...