Jul 13, 2017 Others

Firms in the Real Estate Investment Trusts

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Firms in the Real Estate Investment Trusts

INSTRUCTIONS:

Use Figure 15.7 attached which shows the net debt-to-enterprise value ratio for some select industries to answer both parts of the question. Respond to both parts and include some news from an article that is less than a year old that is applicable to this discussion.



Part 1: Firms in the real estate investment trusts (REITs), airlines, electric utilities, and paper products industries tend to have high leverage. Explain why firms in these industries would prefer to have high leverage. 



Part 2: Firms in the computer hardware, footwear, apparel and luxury goods, and data processing industries tend to have low leverage. Explain why firms in these industries would prefer to have low leverage. 





Operating leverage is the extent to which fixed assets and fixed costs are utilized in business operations. A utility firm, for example, utilizes many plant and equipment. Therefore, the firm has high operating leverage due to high fixed cost to cover. Firms in real estate, airlines, utilities, and paper products have high operating leverage because of high level of fixed assets they have and high fixed costs they have to cover. In order to cover their fixed costs and variable cost, firms in these industries must have high sale volume in order to break-even. 



Financial leverage is the extent to which debt is used in capital structure. A utility firm operates in a stable, predictable industry and therefore can afford to use more financial leverage than an automobile firm for example, which is generally subject to the influence of the business cycle. 

****Include some news from an article that is less than a year old that is applicable to this discussion. *****

CONTENT:

Firms in the Real Estate Investment Trusts Name Institution Firms in the Real Estate Investment Trusts Real Estate Investment Trusts (REITs) are publicly owned organizations that have interests in the commercial real estate. Such companies require high leverage for obvious reasons. First, such companies depend on expensive machinery to maintain their operations and as such, they require more financi

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