
138 The Financial Times Guide to Corporate Valuation
The debt can thus maximally exceed the equity by 10.5 times within the
limits of the ‘investment grade’ definition. This, however, is an extreme
case and would represent a too great financial risk exposure given the
inherent risk in the operations.
So, given the four different levels of debt/equity ratios, we will use a target
debt/equity ratio of 0.42 since:
It gives the company the financing it needs – not more, not less.
It is in line with management’s operational risk assessment.
It provides for sufficient interest coverage.
It appears reasonable compared to the industry’s debt/equity ...