7.5 - Discussion

In Activity 6.2.4 you were exposed to the Cost of Capital by Sector(Links to an external site.). One of the columns provides the percentage of debt financing by industry (D/(D+E)). There are several industries with low percentages of debt financing. Take a look and identify some with a low percentage of debt financing and do the same with firms that have a high percentage of debt financing (the average according to the data in the link is about 42 percent).

Note: Do not use the banking financial services industries.

Based on the types of firms that use a small amount of debt and those that use higher amounts of debt, what can you conclude? What is it about the firms that use low amounts of debt? More debt would lower their cost of capital so what is holding these firms back form taking on more debt? You need to think a little, do not simply say the firms with low debt are all in industry x or industries similar to x. That is obvious, what is the economic intuition? What is the story?