LEVERAGE RATIOS FOR OTHER FIRMS IN THE INDUSTRY Homework Help

LEVERAGE RATIOS FOR OTHER FIRMS IN THE INDUSTRY

Yet another approach to the capital structure decisions is to make a comparison with the equity ratios of companies belonging to the same industry, having a similar business risk rationale of the use of industry standards is that debt-equity ratios appropriate for other firms similar line of business should be appropriate for the company as well. Industry standards the firm is out of line, it is conspicuous in the market place. This does necessarily imply that the firm’s capital structure planning is inappropriate. It may well be that other firms may not be using appropriate debt-equity ratios. They may be more conses or more aggressive risk-takers than desired. However, comparison is helpful as it acts as signal to the management that there may be something wrong with the debt-equity mix company. In other words, what it suggests is that if a firm is out of line, it should reasons why and be satisfied that there are good reasons for it.

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