Business Tax, Cost of Debt, Expense of Equity and Capital Structure: A case examine of REITs and conventional real estate companies in the UK
College or university of Groningen
Faculty of Economics and Business
BSc International Business
Table of contents
1 . Introduction4
2 . REITs7
3. Literary works Review9
three or more. 1 Capital Structure Irrelevance9
3. two Present Models10
4. Data and Methodology12
4. you Regression12
your five. Findings and Discussion16
almost eight. Bibliography30
In January 2007 the united kingdom adopted the globally good real estate investment trust (REIT) routine, allowing property firms to consider the REIT status while using benefit of instant exemption by corporate taxes. This research observes 13 UK REITs and 18 comparable conventional UK property firms during the years 2001-2011 to scrutinize in how long the corporate taxes exemption affects cost of debt and value and eventually capital structure by itself. I employ a difference-in-differences (DiD) analysis, whereby I distinction changes in a lot of variables of REITs and Non-REITs in the pre- and post-treatment period. This create enables me to establish empirical results in the given romantic relationship in the absence of changes in exogenous determinants. I actually find that the price tag on debt of REITs increases by just previously mentioned 30 percent when compared to that of Non-REITs. Moreover, the results demonstrate that although REITs financed a twenty-one percent increase in total property with a nearly 50/50 personal debt to value ratio, Non-REITs financed a 41 percent increase in total assets with 70/30 financial debt to value. This concurs with the requirement that REITs use relatively less financial debt because of the lacking tax motivation and higher implied costs of financial debt. However , I actually do not get significant comes from the DiD analysis, that this is brought on by this treatment.
Key phrases: REITs, corporate tax permission, security issuance decision Analysis theme: Cost of debt, expense of equity and capital framework Supervisor: Doctor Henk vonseiten Eije
1 . Introduction
Capital structure theory plays a decisive position in the corporate and economical world, and although it has become subject to plenty of academic exploration, the relationship of cost of capital and capital structure continues to be an unsolved puzzle pertaining to financial those who claim to know the most about finance (Howe, Shilling (1988), Maris, Elayan (1990)). Furthermore, the majority of the existing exploration results in summary theories and concepts with empirical proof lagging at the rear of the theoretical research, since the included variables tend to be difficult to isolate and to see. (Titman and Wessels, 1988)
This kind of study aims to shed light on the effect of the permission of corporate tax for the cost of debts relative to the price of equity and finally on capital structure by simply analyzing and comparing REITs to typical real estate businesses. REITs are chosen because the center of this study, as they allow a kind of natural try things out. The essential feature to this system is that once conventional real estate property firms start to function under the REIT program, they become tax-exempt, which is likely to cause a sudden increase with their cost of financial debt component as a result of now missing tax defend, previously imposed by the debt. This is produced from the computation for the weighted expense of capital (WACC). That is the total of the cost of equity (Re) multiplied with total collateral (E) over total assets (A) plus the cost of personal debt (Rd) increased with one minus the business tax rate (T) and the ratio total debt (D) over total assets. This study aims to examine whether and by how much the cost of personal debt and equity change following tax exemption and if so how this impacts in turn the main city structure of a firm.
This leads to the subsequent research questions:
1 . Does tax exemption impact the cost of debt and equity and if therefore , by just how much? 2 . Will the capital composition change because of a rise inside the cost of personal debt relative to the cost of equity?
As I complex in the materials review, My spouse and i...
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