See page 496 regarding the Trade-Off theory. "Companies with
safe, tangible assets and plenty of taxable income to shield ought
to have high target debt ratios. Unprofitable companies with risky,
intangible assets ought to rely primarily on equity financing."
This doesn't indicate a tendency, but it suggests that companies
with intangible assets and conservative capital structures (see page
497) should strive for a lower debt ratio than companies with tangible
assets and less conservative capital structures.
The example of Merck seems to describe a firm with assets that
are risky and mostly intangible. Merck's tendency is to equity financin=
g.
This seems to support the answer less.
The Hodges and D'Ambrosio study guide, chapter 18, exercise 18 reads:
"Firms whose assets are risky and mostly intangible tend to borrow
(less,more) _______________ than firms whose assets are tangible and
relatively safe."
Am I insane, or isn't this answer OBVIOUSLY less. Throughout the chapt=
er,
they talk about how pharmacetical companies have practically no debt, w=
hile
airlines borrow heavily. Wouldn't you know that the solution Hodges an=
d
D'Amborsio give is 'more'!
AAAAAAAAAAGGGGGGHHHHHHHHHH!!!!
=