Why No Debt? A FRICTO Analysis of the Capital Structure of Cal-Maine Foods Inc

Cal-Maine Foods Inc., the largest egg producer in the world, has historically operated with low debt. Cal-Maine reported in its 2021 third fiscal quarter no debt on its balance sheet, making this company one of the few debt-free publicly traded agribusinesses in the United States. 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 a certain level—the optimal capital structure—creates economic value for equity holders. 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 uses debt proceeds plus excess cash to repurchase shares at the prevailing price as of the end of May 2021. The target audience is graduate business and agribusiness students, although the case could be used in an elective advanced undergraduate finance course.