Question

Part 1: Firms in the real estate investment trusts (REITs), airlines, electric utilities, and paper products industries tend to have high leverage. Explain why firms in these industries would prefer to have high leverage. Part 2: Firms in the computer hardware, footwear, apparel and luxury goods, and data processing industries tend to have low leverage. Explain why firms in these industries would prefer to have low leverage.

Answer 1

Answer and Explanation:

1. Firms in the real estate industry have high leverage because they are capital intensive businesses, requiring higher capital for their operations and do not make profit or reach breakeven early. Therefore they are more inclined to leveraging than the share market .There is also the benefit of tax savings from debt sources

2. Firms in the computer hardware, footwear, apparel and luxury goods, and data processing industries have low leverage because they can reach breakeven or make profit early and so can rely on share market as against real estate industry.