Info

Disney

Entertainment

Aracruz

Market)

27 See Inselbag and Kaufold (1997).

28 For purposes of this analysis, we looked at debt without operating leases being capitalized because of the difficulty of doing this for all of the comparable firms.

Market Debt Ratio

21.02%

19.56%

30.82%

27.71%

Book Debt Ratio

35.10%

28.86%

43.12%

49.00%

Comparable (Firm): This is a firm that is similar to the firm being analyzed in terms of underlying characteristics - risk, growth and cash flow patterns. The conventional definition of comparable firm is one which is the same business as the one being analyzed, and of similar size.

Source: Value Line

Based on this comparison, Disney is operating at a debt ratio slightly higher than those of other firms in the industry in both market and book value terms, while Aracruz has a market debt ratio slightly higher than the average firm but a book debt ratio slightly lower.

The underlying assumptions in this comparison are that firms within the same industry are comparable, and that, on average, these firms are operating at or close to their optimal. Both assumptions can be questioned, however. Firms within the same industry can have different product mixes, different amounts of operating risk, different tax rates, and different project returns. In fact, most do. For instance, Disney is considered part of the entertainment industry, but its mix of businesses is very different from that of Lion's Gate, which is primarily a movie company, or Liberty Media. Furthermore, Disney's size and risk characteristics are very different from that of Pixar, which is also considered part of the same industry group. There is also anecdotal evidence that since firms try to mimic the industry average, the average debt ratio across an industry might not be at or even close to its optimal.

Comparable (Firm): This is a firm that is similar to the firm being analyzed in terms of underlying characteristics - risk, growth and cash flow patterns. The conventional definition of comparable firm is one which is the same business as the one being analyzed, and of similar size.

dbtfund.xls: There is a dataset on the web that summarizes market value and book value debt ratios, by industry, in addition to other relevant characteristics.

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