Financial Accounting: In an Economic Context

PART 4

Liabilities and Shareholders' Equity: A Closer Look

In December 2009, The New York Times Company issued a very upbeat outlook for its business prospects, despite the lingering effects of the 2008–2009 recession and the tidal wave of change undermining the company's traditional print media business model. Print media advertising revenue for the Times was down 25 percent in the fourth quarter of 2009, and media industry experts talked of nothing except the Internet and technology's inevitable victory over newspapers and other traditional print media outlets. The New York Times Company, however, was optimistic in its outlook, citing digital and online advertising revenue growth, circulation revenue growth, and a more efficient cost structure. Playing a large role in the company's brightened, forward-looking statement was the change to its capital structure: The company had less debt and relatively more equity than in previous periods. Specifically, the company's CEO was quoted as saying, “We have made significant progress in reducing our debt level, with total debt expected to be approximately $800 million at year-end … down from $1.1 billion at the end of 2008.” With such competitive forces aligned against the company, do you think its CEO is justified in her optimism with less debt and more equity? Why does the structure of a company's financing affect its future prospects? How do analysts incorporate debt and equity levels into their evaluation of a company's past and future ...