Fundamentals of Financial Management (Concise 6th Edition)

428 Part 5 Capital Structure and Dividend Policy

Wide variations also exist among! rms within given industries. For example,

although the average ratio of common equity to total capital in 2008 for the phar-

maceutical industry was 70.4%, GlaxoSmithKline had a ratio of only 47.4%. Thus,

factors unique to individual! rms, including managerial attitudes, play an impor-

tant role in setting target capital structures.

Capital Structure Percentages, 2008: Six Industries Ranked

by Common Equity Ratiosa

Tabl e 13 - 4

Industry

Common

Equity

Ratiob

(1)

Long-Term

Debt Ratio

(2)

Times-Interest-

Earned Ratio

(3)

Return on

Equity

(4)

Pharmaceuticals 70.42% 29.58% 16.6 23.70%

Aerospace/Defense 62.11 37.89 33.7 24.00

Railroads 59.17 40.83 7.7 15.90

Computers 55.56 44.44 18.8 30.30

Steel 52.63 47.37 15.2 32.80

Utilities 46.30 53.70 5.9 14.40

a Capital structure ratios are calculated as a percentage of total capital, where total capital is defined as

long-term debt plus equity, with both measured at book value.

b These ratios are based on accounting (or book) values. Stated on a market-value basis, the equity

percentages would rise because most stocks sell at prices that are much higher than their book values.

Source: MSN Money; http://moneycentral.msn.com; May 15, 2008.

To what extent does capital structure vary among di" erent

countries? The following table, which is taken from a study

by Raghuram Rajan and Luigi Zingales, both of the University

of Chicago, shows the median debt ratios of! rms in the larg-

est industrial countries.

Rajan and Zingales show that there is considerable

variation in capital structure among firms within each of

the seven countries. They also show that capital structures

for the firms in each country are generally determined by

a similar set of factors: firm size, profitability, market-to-

book ratio, and the ratio of fixed assets to total assets. All

in all, the Rajan-Zingales study suggests that the points

developed in this chapter apply to firms all around the

world.

Source: Raghuram G. Rajan and Luigi Zingales, “What Do We Know about Capital Structure? Some Evidence from International Data,”

Journal of Finance, Vol. 50, no. 5 (December 1995), pp. 1421–1460. Used with permission.

TAKING A LOOK AT GLOBAL CAPITAL STRUCTURES

Median Percentage of Debt to Total Assets in Di" erent Countries

Country Book Value Debt Ratio

United Kingdom 10%

Germany 11

France 18

Italy 21

Japan 21

United States 25

Canada 32