Question

The M& M capital structure theories in chapters 15 and 21 persuasively argue that the optimal long-term debt is not a 0.0% debt. Table 15-1 in the text shows that, consistent with M&M theories, the average long-run debt to equity ratio in many different industries is positive (e.g., 14% for info technology, 38% for energy, and 80% for utilities). Yet some technology firms, such as Facebook, Alphabet (Google), and Apple, do not use any long-term debt. Please explain whether it makes financial sense for such firms to use no debt. You would want to use your understanding of capital structure material in chapters 15 and 21, especially signaling theory, R&D under asymmetric information theory, financial distress costs, and debt tax shield in your answers.

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Answer:

Technical firms have generally tended to not utilize debt on the grounds that their income streams would in general be exceptionally unstable and they would not like to face the challenges of being not able to support their debt (and thus face insolvency) in times of enormous downturns. At the point when an technology organization finds a workable pace of an Apple, Google, Microsoft, there is no explanation not to utilize some debt to use profit, as the odds of business getting so terrible that they can't support any obligation is exceptionally impossible. In any case, convention continues. This is the reason you will in general observe innovation organizations collect huge money adjusts, for example to ensure against a time of delayed and extreme business downturn.