irms raise funds to finance their operations by issuing debt to lenders and by issuing equity to shareholders. If the amount of debt employed by a firm is relative to the amount of equity, the firm is said to have a high degree of financial leverage. One measure of a firm’s leverage is its capitalization ratio – the ratio of the value of a firm’s equity to the total value of its equity plus debt.The smaller firm’s capitalization ratio is, the more highly leveraged the firm is. The size of the capitalization ratio, however, depends on whether is computation is based on the (accounting) book value of equity or the market value of equity.
In a study comparing the leverage of American and Japanese firms, Michel and Shaked computed the capitalization ratios for a sample of American firms and for a sample of Japanese firms, using both book values and market values of equity. As expected, they observed that the shapes of the distributions of capitalization ratios differed between American and Japanese firms.
Michel and Shaked were primarily interested in testing “the commonly held belief among Japanese businessmen, Japanese government officials, and the investment community worldwide that Japanese firms on average are more highly leveraged than their American counterparts.” Statistics homework help
Download the file below to help you work through the case discussion.
Module 2 JMP.zip Download Module 2 JMP.zip
- From each of 10 industries, Michel and Shaked selected a sample of 13 American firms and 13 Japanese firms. The average book value-based capitalization ratio that were computed for each of the 10 industries, for 1981, are shown in Table A. Table B presents similar information, using market value-based capitalization ratios. What would you conclude from a comparison of these ratios?
- Conduct a test to determine if Japanese firms are more highly leveraged than American firms based on book-value-based capitalization ratios. Use α = .05.
- Conduct a test to determine if Japanese firms are more highly leveraged than American firms based on market-value-based capitalization ratios. Use α = .05.
Table A Book Value-Based Capitalization Ratios
Table B Market Value-Based Capitalization Ratios