Why no debt? The capital structure of Cal-Maine Foods Inc

Cal-Maine Foods Inc., the largest shell egg producer in the world, had historically operated with low debt levels relative to debt ratios in other industries and within agribusiness. In its third fiscal quarter report, issued by the end of March 2021, Cal-Maine reported no debt in its balance sheet, making this company one of the few debt-free publicly traded agribusinesses in the U.S. This case analyzes Cal-Maine’s capital structure, which represents a rare case for exploring and challenging the notion of optimal capital structure in theory and practice. Understanding the rationale behind a debt-free firm’s policy is puzzling because financial theory predicts that adding debt up to certain level −the optimal capital structure− creates economic value. According to surveyed chief financial officers, there is also evidence that practitioners use an optimal capital structure framework for financial management decisions. By applying a framework allowing for both qualitative and quantitative analysis, this case reviews the benefits and costs of debt in the capital structure, as applied to Cal-Maine. The case asks students to evaluate potential recapitalization policies in which Cal-Maine adds debt to its capital structure and use debt proceeds plus excess cash to repurchase shares at the prevailing price as of the end of May 2021.