M&M Pizza Essay
1. What is Capital Structure (CS)?
It is the mix of debt and equity on the balance sheet. The basic capital structure question is: How much debt is right for this company? Contrary to what your momma may have taught you, according to the so-called finance experts too little debt may be just as costly as too much debt, because debt financing is usually the cheapest source. This is why it is often said that debt is a two-edged sword: too much is bad but so is too little.
2. Why is CS important?
It directly impacts the cost of capital and therefore directly affects the value and profitability of the company. For example, at one time Hershey Foods determined that its …show more content…
Management and the board are charged with these important decisions. How they decide differs from firm to firm but in general they use: (1) internal studies and investment bankers to help crunch the WACC formulas, (2) follow the industry average, and/or (3) use their intuition.
7. Is the CS of companies similar within an industry?
Yes. Companies in uncertain or cyclical industries (often with higher betas) need the flexibility that low-debt brings. For example, drug companies might make it big with one product, but they never know when if the next drug will be approved and how it will sell. Companies in more stable industries (with lower betas) are in a better position to carry higher debt, such as cable television. Industries that require a lot of heavy industrial equipment or infrastructure typically need more L/T financing, such as airlines or electrical utilities. On the other hand, industries with little infrastructure usually need little debt, such as computer software companies. 8. What is the Overall Pattern of CS in the U.S.?
Debt/Total Assets is about 60% based on book values, but closer to 30% based on market values.
Recently, long-term financing has come from debt more often than equity, with equity financing actually being negative (more stock repurchased than issued) in some years. However, IPOs have been picking up lately. Overall, companies in the U.S. have not used debt