Capital Structure Decisions

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(^1) The long-term debt ratio is the percent of total long-term financing that comes from debt: (Long-term
debt)/(Long-term debt
Equity). The ticker symbol is in parenthesis.
For updates on a company’s
ratio, go tohttp://finance.
yahoo.com,enter the ticker
symbol for a stock quote,
and select Profile after the
quote comes up. Click on
Ratio Comparisons (on the
left side of the Profile sheet)
for updates on the sector
ratio.

A company can obtain long-term financing in the form of equity, debt, or some

combination. The accompanying table shows the long-term debt ratios for different

business sectors and selected individual companies within those industries.^1 There are

obvious differences between sectors’ average debt ratios, with Technology having a

very low average ratio (18.7 percent) and others, such as Consumer Cyclical (72.1 per-

cent), having much higher ratios. But notice that within each sector some companies

have very low levels of debt, while others have very high levels. For example, the aver-

age debt ratio for Consumer/Noncyclical is 46.8 percent, but Starbucks has no long-

term debt versus Kellogg’s 86.9 percent. Why do we see such variation across compa-

nies and business sectors, and can a company make itself more valuable through its

choice of debt ratio? Keep these questions in mind as you read the chapter.

Long-Term

Sector and Company Debt Ratio

Technology 18.7%

Agilent Technologies Inc. (A) 0.0%

IKON Office Solutions (IKN) 59.3

Energy 29.6

Exxon Mobil Corporation (XOM) 9.1

Chesapeake Energy Corp. (CHK) 70.2

Health care 32.0

Patterson Dental Company (PDCO) 0.0

HCA Inc. (HCA) 58.5

Transportation 39.8

Roadway Corporation (ROAD) 0.0

Continental Airlines, Inc. (CAL) 74.9

Basic materials 45.7

Anglo American PLC (AAUK) 0.0

Kaiser Aluminum Corp. (KLU) 84.4

Capital goods 45.9

Winnebago Industries (WGO) 0.0

Caterpillar Inc. (CAT) 68.1

Consumer/noncyclical 46.8

Starbucks Corporation (SBUX) 0.0

Kellogg Company (K) 86.9

Conglomerates 54.3

Minnesota Mining & Manufacturing (MMM) 16.7

TRW, Inc. (TRW) 66.8

Utilities 60.9

Reliant Resources, Inc. (RRI) 12.3

CMS Energy Corp. (CMS) 73.0

Services 63.0

Administaff, Inc. (ASF) 0.0

Allied Waste Industries (AW) 84.3

Consumer/cyclical 72.1

Callaway Golf Company (ELY) 0.0

Black & Decker Corp. (BDK) 60.8

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