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Unformatted text preview: a higher percentage
of debt? Not necessarily. Capital structure varies among companies in the same industry and
across industry groups. Within the restaurant sector, for example, you’ll find California Pizza
Kitchen and Cheesecake Factory with no debt; debt-to-equity ratios of 20–30 percent at Wendy’s
and Applebee’s; Papa John’s and Dave & Buster’s at around 60 percent; Chart House and
McDonald’s with close to equal amounts of debt and equity; and Atomic Burrito with more than
twice as much debt as equity.
A company’s choice of debt versus equity depends on many factors. Conditions in the equity
markets may be unfavorable when a company needs to raise funds. When interest rates are low,
the debt markets become attractive. Before issuing debt, however, a company must be sure that
it can generate cash flows adequate to repaying its debt obligations.
Each type of long-term capital has its advantages. As we learned in Chapter 11, debt costs
less than equity. Adding debt, with its fixed rate, to the capital structure creates financial lever...
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