Question

Use some real examples to show how capital structure differs substantially across different industries.

Answer 1

The capital structure of an organization can vary quite significantly when it comes to industry in which it operates. For example, cyclical industry like mining industry are not regarded suitable for debt obligations, the cash flows of a company is quite unpredictable in such industry and therefore fix obligation funding like debt which includes mandatory repayment every month or year can be risky for such companies, while there is exact opposite in banking industry where leverage is used more often and huge amount of debt is accumulated due to the nature of their business model and its demand. A real life example of the same can be taken of a mining company namely Newmont mining company, the company is engaged in the business of mining and is currently having a debt to equity ratio of 0.32, this means that the debt applied by the company in comparison to its equity is very less. On the other hand, Wells Fargo, a US bank is having a debt to equity of 1.36 and almost same picture can be seen in most of the companies within the respective industry, therefore, the use of debt and capital and overall capital structure decision can be vastly affected by the industry in which a company operates,