9 Debt–equity ratios vary across industries. We present three factors determining the target debt–equity ratio:

(a) Taxes: Firms with high taxable income should rely more on debt than firms with low taxable income.

(b) Types of assets: Firms with a high percentage of intangible assets such as research and development should have low debt. Firms with primarily tangible assets should have higher debt.

(c) Uncertainty of operating income: Firms with high uncertainty of operating income should rely mostly on equity.