Given the following conditions, would you be inclined to have relatively high or low level of debt If your answer is correct, you will see that the same would also be true at the corporate level Consider each condition independently Personal High Low Corporate Very stable and predictable earnings Low standard deviation of earnings and ROE Substantial real estate property Substantial fixed assets property, plant, equipment Low salary today, but with high earnings growth potential A very high P E ratio High tax rate High effective tax rate Commission income that can vary significantly each month Earnings that are highly seasonal and or sensitive to economic conditions Stable and predictable earnings Low stock beta Poor credit score (high default risk) Low credit (debt) rating (high default risk) Low fixed expenses relative to earnings Relatively HIGH net earnings You are an entrepreneur just starting a new business Early stage start up High fixed expenses relative to earnings Relatively low net earnings Your parents were bankrupt when you were a child Firm just recovered from bankruptcy 10 years ago

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Given the following conditions, would you be inclined to have relatively high or low level of debt? If your answer is correct, you will see

Given the following conditions, would you be inclined to have relatively high or low level of debt? If your answer is correct, you will see that the same would also be true at the corporate level. Consider each condition independently.

Personal	High/Low	Corporate
Very stable and predictable earnings.		Low standard deviation of earnings and ROE
Substantial real estate property		Substantial fixed assets property, plant, equipment
Low salary today, but with high earnings growth potential		A very high P-E ratio
High tax rate		High effective tax rate.
Commission income that can vary significantly each month.		Earnings that are highly seasonal and/or sensitive to economic conditions.
Stable and predictable earnings		Low stock beta.
Poor credit score (high default risk).		Low credit (debt) rating (high default risk).
Low fixed expenses relative to earnings.		Relatively HIGH net earnings.
You are an entrepreneur just starting a new business		Early-stage start up.
High fixed expenses relative to earnings.		Relatively low net earnings.
Your parents were bankrupt when you were a child.		Firm just recovered from bankruptcy 10 years ago.