The second half of Chapter 12 discusses the use of debt financing in capital structure. The book refers to this practice as leverage, because the use of debt magnifies the the EPS (earnings per share) that results from any level of EBIT (earnings before interest expense and taxes), both in the positive direction as well as in the negative direction. We know that some industries, such as utilities that provide us with electricity and natural gas, insurance companies, and supermarket chains all have consistently higher levels of debt in their capital structure (leverage) than the average US company. We also know that by comparison, corporations in Europe and Japan have a higher proportion of debt in their capital structure than their US counterparts.
Discuss reasons why these types of companies have capital structure policies that call for relatively high levels of debt in their capital structures. Also describe reasons that would cause their managements to alter the mix of debt and equity in the capital structure, in response to managerial, market, and general economic conditions.