Your answer: C was incorrect. The correct answer was A) Budd Footwear is most likely to have the higher debt to equity ratio. Firms operating in countries with weak legal systems have higher agency costs and tend to use more debt in their capital structures. Also, firms like Kimbro that operate in an environment with low information asymmetries tend to use more equity financing and therefore have low debt to equity ratios. Budd Footwear is also most likely to have a shorter maturity debt structure. Firms operating in countries with more liquid capital markets tend to use longer maturity debt, so the less liquid market that Budd Footwear operates in would argue for shorter maturities. Also, companies operating in countries with high GDP growth like Kimbro tend to have longer debt maturities, which again would argue for Budd Footwear having the shorter debt maturity structure. (Study Session 8, LOS 32.p) —> I get the weak legal system translates to higher agency costs translating to wanting to use less EQ financing and more debt finance. But what is the rationale for the others?
americans like longer maturity debt random country which i think has a weak legal system in my opinion (no names, dont wanna offend anyone) will use more debt in capital structure
I got the shorter duration part right, as it is intuitive, but I just assumed that lenders were less likely to pile on debt in an emerging market…obviously I’m wrong.
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > I got the shorter duration part right, as it is > intuitive, but I just assumed that lenders were > less likely to pile on debt in an emerging > market…obviously I’m wrong. the debt that there using is shorter term though- and typically floating b/c of inflation concerns. Think of a risky small business… cannot get equity capital or issue bonds, but the local bank will fund them at prime+10%. That image helps me remember anyway
Yes, that is a good analogy.