Refer to the capital structures given above. a). What do you notice about the ty
ID: 2722578 • Letter: R
Question
Refer to the capital structures given above.
a). What do you notice about the types of industries with respect to their average D/E ratios?
b). Are certain types of industries more likely to be highly leveraged than others?
c). What are some possible reasons for this observed segmentation?
d). Do the operating results and tax history of the firms play a role?
e). How about their future earnings prospects?
Industry Ratio of Debt to Total Capital Ratio of Debt to Equity # of Companies SIC Code Representative Companies Electric utilities 48.54% 94.31% 33 491 American Electric Power Computer equip. 9.09 10.02 48 357 Apple Paper 27.75 38.4 24 26 Avery Dennison Petroleum refining 32.37 47.65 18 29 Chevron Airlines 63.92 177.19 19 5412 Delta Pay TV 63.56 193.88 5 484 Dish Motor Vehicles 17.77 21.6 25 371 Ford Fabric Apparel 15.86 18.84 14 23 Dept. Stores 27.4 37.73 8 531 J.C Penny Eating places 23.4 30.54 42 5812 Mcdonalds Drugs 7.8 8.46 194 283 Merck Steel Works 19.96 24.95 9 331 NucorExplanation / Answer
Answer : (a) Pay TV, Air Line & Electrical utilities Industries are based on debts. These are very risky industries on the view of investments. While drugs, Computer equip and fabric apperal industries are low debts or based on share holder's fund, so these industries are low risk on the view of investments.
(b) Pay TV, Air Line & Electrical utilities indutries are highly leveraged than others. because An industry with significantly more debt than equity is considered to be highly leveraged.
(c) Pay TV, Air Line & Electrical utilites which are highly leveraged indutries than others means its capital expenditures are more than other industries. While drugs, computer quip and fabric apperal indutries where low debt to equity ratio means there are profit margin are high and capital expenditures are less than other industries.
(d) yes operating result and tax history of the firm play important role to attract the investors. if a firm good track record of operating result, they can attract more and more investors for investments. you can see , 194 companies are working in drugs industries while 5 companies are working in Pay TV indusries.
(e) Future earning prospects are also good for drugs industries because the have less interest burden in comparison of other industries while future earning prospectus are not good for Pay TV industries because major parts of its earning go to payment of interest. they are over burden of debts.