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Capital Structure in Practice
Financial researchers have studied data from corporations over long time periods to determine whether
any patterns or regularities exist in the capital structure of firms. Before we examine the results of
these studies, let‟s look at some timely capital structure data for several well-known corporations.
Exhibit 5.9 presents the capital structure at the time this chapter was written for 12 firms that can be
classified into four broad categories; technology companies (Apple, Cisco, and Intel); consumer
products companies (Colgate-Palmolive, Kraft Foods, and Procter & Gamble); manufacturers
(Boeing, Caterpillar, and United Technologies); and retailers (Limited Brands, Macy‟s, and
Nordstrom). The numbers shown are debt and equity as a percent of total capitalization, using market
value of equity for all companies.
Exhibit 5.9 Capital structure.
Although there is some variability within categories, there are also easily observable differences
between the four categories. As a group, the technology companies have the lowest debt percentages,
the consumer products companies have higher debt percentages, the manufacturing companies have
still higher debt percentages, and the retailers have the highest debt percentages. Upon examining
these data you won‟t be surprised to learn that researchers have found strong industry effects in capital
structure, with some industries using very little debt finance and other industries using much more
debt finance. We next discuss some of the results obtained by research into capital structure, which
will help to explain the industry effect shown in Exhibit 5.9.
Researchers have studied whether the investment opportunities available to a firm have an impact
on the firm‟s capital structure. Companies with large investment opportunities are typically fastgrowing
firms in fast-growing and volatile industries, with industry beta coefficients well above 1.0,
which also require large amounts of capital investment in risky new projects. Remember that debt
finance creates debt service, and large amounts of debt and debt service can be dangerous for a fastgrowing
firm. Assume Company A has many good investment opportunities and a large amount of
debt finance and debt service. In a strong economy, Company A has sufficient cash flow to pay its
debt service and invest in all of its good projects, so all is well. In a weak economy, however,