Discussion Questions
1. To get an overall picture of each company's capital structure it is helpful to see a chart that summarizes the company's capital structure over the past decade. To obtain this chart, choose a company to start with and select FINANCIALS. Next, select MORE_THOMSON REPORTS &CHARTS_CAPITAL STRUCTURE. This should generate a chart that plots the company's long-term debt, common equity, and total current liabilities over the past decade. What, if any, are the major trends that emerge from looking at these charts? Do these companies tend to have relatively high or relatively low levels of debt? Do these companies have significant levels of current liabilities? Have their capital structures changed over time? (Note an alternative chart can be found by selecting FINANCIALS_FUNDAMENTAL RATIOS_ WORLDSCOPERATIOS_DEBT TO ASSETS & EQUITY RATIOS.)
2. To get more details about the companies' capital structures over the past five years, select FINANCIALS_FUNDAMENTALRATIOS_THOMSON RATIOS. From here you can select ANNUAL RATIOS and/or 5 YEAR AVERAGE RATIOS REPORT. In each case, you can scroll down and look for "Leverage Ratios." Here you will find a variety of leverage ratios for the past 5 years. (Notice that these 2 pages offer different information. The ANNUAL RATIOS page offers year-end leverage ratios, while the 5 YEAR AVERAGE RATIOS REPORT offers the average ratio over the previous 5 years for each calendar date. In other words, the 5 YEAR AVERAGE RATIOS REPORT smooths the changes in capital structure over the reporting period.) Do these ratios suggest that the company has significantly changed its capital structure over the past 5 years? If so, what factors could possibly explain this shift? (Financial statements might be useful to detect any shifts that may have led to the company's changing capital structure. You may also consult the company's annual report to see if there is any discussion and/or explanation for these changes. Both the historical financial statements and annual report information can be found via Thomson One.)
3. Repeat this procedure for the other 3 auto companies. Do you find similar capital structures for each of the 4 companies? Do you find that the capital structures have moved in the same direction over the past 5 years, or have the different companies changed their capital structures in different ways over the past 5 years?
4. The financial ratios investigated thus far are based on book values of debt and equity. Determine whether using the market value of equity (market capitalization found on the OVERVIEW page) makes a significant difference in the most recent year's "LT Debt Pct Common Equity" and "Total Debt Pct Total Assets." (Note: "LT Debt" is defined by Thomson One as the "Long Term Debt" listed on the balance sheet, while "Total Debt" is defined as "Long Term Debt" plus "ST Debt & Current Portion Due LT Debt.") Are there big differences between the capital structures measured on a book or market basis?
5. You can also use Thomson One to search for companies with either very large or very small debt ratios. For example, if you want to find the top 50 companies with the highest debt ratio select: SEARCH FOR COMPANIES, ADVANCED SEARCH, ALL COMPANIES, THOMSON FINANCIAL, RATIOS, and LEVERAGE. From here, let's select "LT Debt Pct Total Cap 5 Yr. Avg." (This will focus in on the average capital structure over the past 5 years, which should give us perhaps a better indication of the company's long-run target capital structure.) Once you click on SELECT, you should see the "Search Expression Builder" screen. From here, you go to "Rank" and select the top 50 by typing 50 in the box below rank, and click on ADD. You can easily change this to also select the bottom 50 (or perhaps the bottom 5 or 10 percent). Take a close look at the resulting firms by clicking on SEARCH. Do you observe any differences between the types of firms that have high debt levels and the types of firms that have low debt levels? Are these patterns similar to what you expect after reading the chapter? (As a quick review, you may want to look at the average capital structures for different industries, which is summarized in the text). Note: The searches are cumulative, so that if you ask for the top 10 percent of the database, and follow that by asking for the bottom 5 percent, you will be shown the bottom 5 percent of the top 10 percent. In other words, you would only see a small subset of the firms you are asking for. Hence, when beginning a new search, clear all existing searches first.
6. From the submenu just above the list of firms, you may choose a number of options. "List" displays a list of the firms and allows you to access a firm report. "Profiles" provides key information about the firms, such as ticker, country, exchange, and industry code. "Financials" gives a couple of key financial figures (expressed in US dollars) from the firms' balance sheets and income statements. "Market Data" includes the firms' market capitalization, current price, P/E ratio, EPS, etc. "Report Writer" allows you to create customized company reports.