Refer to the observed capital structures given in Table 17.3 of the text. 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.

Table 17.3: Capital Structure Ratios for Selected U.S. Nonfinancial Industries (medians), Five-Year Average

Debt as a Percentage of the Market Value

of Equity and Debt (Industry Medians)

High Leverage

Radio and television ............................................................ .......59.60

broadcasting stations

Air transport ................................................................................ 45.89

Hotels and motels.................................................................. .....45.55

Building construction ................................................................. 42.31

Natural gas distribution ............................................................ 33.11

Low Leverage

Electronic equipment ................................................................ 10.58

Computers .................................................................................... 9.53

Educational services .................................................................... 8.93

Drugs ............................................................................................. 8.79

Biological products ...................................................................... 8.05

Definition: Debt is the total of short-term debt and long-term debt.

Source: Ibbotson 2011 Cost of Capital Yearbook (Chicago: Morningstar, 2011).