438 Part 5 Capital Structure and Dividend Policy
Access the Thomson ONE problems through the CengageNOW™ web site. Use the Thomson ONE—Business School Edition online
database to work this chapter’s questions.Exploring the Capital Structures for Four of the
World’s Leading Auto Companies
This chapter provides an overview of the effects of leverage and describes the process that! rms use
to determine their optimal capital structure. The chapter also indicates that capital structures tend to
vary across industries and across countries. If you are interested in exploring these differences in more
detail, Thomson ONE provides information about the capital structures of each of the companies it
follows.
The following discussion questions demonstrate how we can use this information to evaluate the
capital structures for four of the world’s leading automobile companies: General Motors (GM-N), Ford
(F-N), BMW (BMW-FF), and Toyota (7203-TO). (The combination of letters and numbers in parentheses
are the Thomson ONE quote symbols.) As you gather information about these companies, be mindful of
the currencies in which these companies’! nancial data are reported.Discussion Questions
- To get an overall picture of each company’s capital structure, it is helpful to look at a chart that summarizes the
company’s capital structure over the past decade. To obtain this chart, choose a company to start with and
select FINANCIALS. Next, select MORE>THOMSON REPORTS & CHARTS>CAPITAL STRUCTURE. This
should generate a chart that plots the company’s long-term debt, common equity, and total current liabilities
over the past decade. What, if any, are the major trends that emerge from your looking at these charts? Do these
companies tend to have relatively high or relatively low levels of debt? Do these companies have significant
levels of current liabilities? Have their capital structures changed over time? - To get more details about the companies’ capital structures over the past 5 years, select FINANCIALS>
FINANCIAL RATIOS>THOMSON RATIOS. From here, you can select ANNUAL RATIOS and/or 5 YEAR
AVERAGE RATIOS REPORT. In each case, you can scroll down and look for “Leverage Ratios.” Here you will
find a variety of leverage ratios for the past 5 years. (Notice that these two pages offer different information. The
ANNUAL RATIOS page offers year-end leverage ratios, while the 5 YEAR AVERAGE RATIOS REPORT offers
the average ratio over the previous 5 years for each calendar date. In other words, the 5 YEAR AVERAGE
RATIOS REPORT smoothes the changes in capital structure over the reporting period.) Do these ratios suggest
that the company has significantly changed its capital structure over the past 5 years? If so, what factors could
possibly explain this shift? (Financial statements might be useful to detect any shifts that may have led to the
company’s changing capital structure. You may also consult the company’s annual report to see if there is any
discussion and/or explanation for these changes. Both the historical financial statements and annual report
information can be found via Thomson ONE.) - Repeat this procedure for the other three auto companies. Do you find similar capital structures for each of the
four companies? Do you find that the capital structures have moved in the same direction over the past 5 years,
or have the different companies changed their capital structures in different ways over the past 5 years? - The financial ratios investigated thus far are based on book values of debt and equity. Determine whether using
the market value of equity (market capitalization found on the OVERVIEW page) makes a significant difference
in the most recent year’s “LT Debt Pct Common Equity” and “Total Debt Pct Total Assets.” (Note: “LT Debt” is
defined by Thomson ONE as the “Long Term Debt” listed on the balance sheet, while “Total Debt” is defined
as “Long Term Debt” plus “ST Debt & Current Portion Due LT Debt.”) Are there big differences between the
capital structures measured on a book or market basis? - You can also use Thomson ONE to search for companies with very large or very small debt ratios. For example,
if you want to find the top 50 companies with the highest debt ratio, select “SCREENING & TARGETING”.
Now select ADVANCED SEARCH, ALL COMPANIES, THOMSON FINANCIAL, RATIOS, and LEVERAGE.
From here, select “LT Debt Pct Total Cap 5 Yr. Avg.” (This will focus in on the average capital structure over
the past 5 years, which should give us a better indication of the company’s long-run target capital structure.)
Discussion Questions
1. To get an overall picture of each company’s capital structure, it is helpful to look at a chart that summarizes the
company’s capital structure over the past decade. To obtain this chart, choose a company to start with and
select FINANCIALS. Next, select MORE>THOMSON REPORTS & CHARTS>CAPITAL STRUCTURE. This
should generate a chart that plots the company’s long-term debt, common equity, and total current liabilities
over the past decade. What, if any, are the major trends that emerge from your looking at these charts? Do these
companies tend to have relatively high or relatively low levels of debt? Do these companies have significant
levels of current liabilities? Have their capital structures changed over time?
2. To get more details about the companies’ capital structures over the past 5 years, select FINANCIALS>
FINANCIAL RATIOS>THOMSON RATIOS. From here, you can select ANNUAL RATIOS and/or 5 YEAR
AVERAGE RATIOS REPORT. In each case, you can scroll down and look for “Leverage Ratios.” Here you will
find a variety of leverage ratios for the past 5 years. (Notice that these two pages offer different information. The
ANNUAL RATIOS page offers year-end leverage ratios, while the 5 YEAR AVERAGE RATIOS REPORT offers
the average ratio over the previous 5 years for each calendar date. In other words, the 5 YEAR AVERAGE
RATIOS REPORT smoothes the changes in capital structure over the reporting period.) Do these ratios suggest
that the company has significantly changed its capital structure over the past 5 years? If so, what factors could
possibly explain this shift? (Financial statements might be useful to detect any shifts that may have led to the
company’s changing capital structure. You may also consult the company’s annual report to see if there is any
discussion and/or explanation for these changes. Both the historical financial statements and annual report
information can be found via Thomson ONE.)- Repeat this procedure for the other three auto companies. Do you find similar capital structures for each of the
four companies? Do you find that the capital structures have moved in the same direction over the past 5 years,
or have the different companies changed their capital structures in different ways over the past 5 years? - The financial ratios investigated thus far are based on book values of debt and equity. Determine whether using
the market value of equity (market capitalization found on the OVERVIEW page) makes a significant difference
in the most recent year’s “LT Debt Pct Common Equity” and “Total Debt Pct Total Assets.” (Note: “LT Debt” is
defined by Thomson ONE as the “Long Term Debt” listed on the balance sheet, while “Total Debt” is defined
as “Long Term Debt” plus “ST Debt & Current Portion Due LT Debt.”) Are there big differences between the
capital structures measured on a book or market basis? - You can also use Thomson ONE to search for companies with very large or very small debt ratios. For example,
if you want to find the top 50 companies with the highest debt ratio, select “SCREENING & TARGETING”.
Now select ADVANCED SEARCH, ALL COMPANIES, THOMSON FINANCIAL, RATIOS, and LEVERAGE.
From here, select “LT Debt Pct Total Cap 5 Yr. Avg.” (This will focus in on the average capital structure over
the past 5 years, which should give us a better indication of the company’s long-run target capital structure.)