Big Old Serious Supermarket (BOSS) is a retail company that manages a chain of supermarkets, operating solely in the US market. The company has issued common stock equity and bonds to finance its operations. A financial analyst is undertaking a comparative analysis between BOSS and Newcomer. He has identified the following differences between the two companies: Newcomer, being a younger company, is smaller than BOSS both in terms of total assets and market value. Newcomer operates only a few brick and mortar stores, as it mostly does home delivery for its products. As a result, its ratio of fixed to total assets is much lower than that of BOSS. The stock of Newcomer trades at a much higher trailing price-to-earnings ratio than that of the stock of BOSS. This is because Newcomer is following a very aggressive marketing strategy and therefore investors expect its revenues and earnings to grow rapidly in the future. BOSS, being an established company with loyal customers, is expected to maintain its moderate but steady growth rate. Which of the two companies is expected to have a higher leverage ratio based on the three aforementioned differences? (use trade-off theory of capital structure)
Big Old Serious Supermarket (BOSS) is a retail company that manages a chain of supermarkets, operating solely in the US market. The company has issued common stock equity and bonds to finance its operations.
A financial analyst is undertaking a comparative analysis between BOSS and Newcomer. He has identified the following differences between the two companies:
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Newcomer, being a younger company, is smaller than BOSS both in terms of total assets and market value.
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Newcomer operates only a few brick and mortar stores, as it mostly does home delivery for its products. As a result, its ratio of fixed to total assets is much lower than that of BOSS.
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The stock of Newcomer trades at a much higher trailing price-to-earnings ratio than that of the stock of BOSS. This is because Newcomer is following a very aggressive marketing strategy and therefore investors expect its revenues and earnings to grow rapidly in the future. BOSS, being an established company with loyal customers, is expected to maintain its moderate but steady growth rate.
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Which of the two companies is expected to have a higher leverage ratio based on the three aforementioned differences? (use trade-off theory of capital structure)
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