1.6 Significance of Study
One of the significant contribution of this study is to help investors and managers to determine the capital structure of REITs by analyzing the relationship between determinants of capital structure and leverage. A study about REITs is rarely performed in Malaysia. In this study, it would contribute to a more comprehensive understanding on capital structure of REITs and their characteristics. It helps to identify the main determinants of capital structure of REITs by examining the determinants and their correlation between leverage.
In addition, this study can help managers and investors to plan their investments so that they can sustain and maintain competitive in the market. This study also shed light to the audience
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for investments in real estate. Its major income is rental and it is required to distribute most of its profits to its unit holders. (IRBM, 2012). According to Wong (2004), REITs is a trust that pool funds from investors by acquiring and and operating income generating real estates then distributes the income to investors as dividends. REITs are investment tools to create a flow of funds to the property sector and it has both attributes of stock and bond making it a hybrid of stocks and bonds (Corgel, Mcintosh and Ott, …show more content…
Thus in practice, most of the REITs serve as a tax exempt entities and passing their organizational profits directly through to the individual tax returns. Trade-off theory predicts that an optimal internal capital structure exists for a firm that weighs the benefits of debt against the bankcruptcy cost of debt.
According to Howe and Shilling (1988), REITs is required to have a 100% equity capital structure if there is absence of tax deductibilty. It means it will be too expensive to issue debt and they will be at a economical disadvantage if REITs have to compete for debt funds against non-REIT firms that receive the tax benefit of debt. However, Jaffe (1991) disagree with this statement. He shows that for REITs, capital structure irrelevance does indeed hold, theoretically following the original Modigliani and Miller (1958) irrelevant proposition.
2.3.2 Pecking Order
The purpose of this paper is to provide a summary of the article called “Can We Keep Our Promises?” by Robert D. Arnott, and to help better understand the three key risks facing each investor.
The first thing Tremont has to do is to start using a different discount rate. Rather than using the CFO’s suggested cost of debt as the discount rate, it would be more appropriate to use Weighted Average Cost of Capital, as Tremont uses a mix of debt and equity.
In assessing Du Pont’s capital structure after the Conoco merger that significantly increased the company’s debt to equity ratio, an analyst must look at all benefits and drawbacks of a high debt ratio. The main reason why Du Pont ended up with a high debt to equity ratio after acquiring Conoco was due to the timing and price at which they bought Conoco. Du Pont ended up buying the firm at its peak, just before coal and oil prices started to fall and at a time when economic recession hurt the chemical industry of Du Pont. The additional response from analysts and Du Pont stockholders also forced Du Pont to think twice about their new expansion. The thought of bringing the debt ratio back to 25% was brought on by the fact that the company saw that high levels of capital spending were vital to the success of the firm and that high debt levels may put them at higher risk for defaulting.
Zimmerman, J. L. (1983). Taxes and firm size. Journal of accounting and economics, 5, 119
Cost of Equity (Ce) was calculated based on the CAPM formula. 30-year T-bond was used as a long-term risk-free security to get the risk-free rate, since Marriott used the cost of long-term debt for its lodging cost-of-capital calculations. The market premium 8.47 was the arithmetic-average spread between the S&P 500 returns and the short-term US T-bills between 1926-1987. This market premium is consistent with the current academic suggestions and it was used in all calculations of this exercise.
This paper is written to provide a reasonably comprehensive overview of Section 1031 of the IRC as it pertains to real estate transactions, and to offer some thoughts on the wealth-creation advantages that 1031 Exchanges offer.
This approach was formed without applying the taxes, but with including the taxes it should be as the following:. The First Proposition with taxes: In this section Modigliani and Miller applied the first proposition approach with taxes, findings to this is that the capital structure directly impacts the firm’s market value, this is because M&M found that firms who have got more debt in their capital structure are more likely to be valuable or have a higher market value than other firms who have only equity, this is because of the tax shield effect which is a taxation system that excludes all the paid interests on the debt.
Dhaliwal, D.S., Newberry, K.J., Weaver, C.D. Corporate Taxes and Financing Methods for Taxable Acquisitions, Contemporary Accounting Research. 22 (1), Spring 2005.
Scholastic Company is a multibillion dollar children’s book publisher and distributor with more than 9,000 worldwide employees (Scholastic Inc., n.d.). Scholastic leases some of its physical office and storage locations and equipment (as cited in Gibson, 2011). Cornaggia, Franzen, and Simin (2013) noted the reasons firms lease may be the result of a company’s financial distress which prevents sufficient capital being raised to purchase instead of leasing. They also suggested if profitability of the firm is not at issue, leasing can be used to reduce taxes thus reducing borrowing costs. Though the reason for maintaining material lease obligations is not disclosed in its financial statements (as cited in Gibson, 2011), Scholastic’s ability to satisfy its long-term commitments is important for investors, creditors, and management. The long-term borrowing capacity of Scholastic can be determined through an analysis of its times interest earned, fixed charge coverage, and debt ratios.
This assignment is concerned with your understanding of the key issues relative to portfolio analysis and investment. In completing this assignment you are to limit your scope to the US stock markets only. Use the Cybrary, the Internet, and course resources to write a 2-page essay which you will use with new clients of your financial planning business which addresses the following issues and/or practices:
You would not buy a home, car or other large purchases without researching what product offered you the most for your money. The same is true when investing in a company. Investors do avid research on multiple companies to find what company matches the investors' criteria. In this paper Team C will research both AT&T and Verizon's financial documents. Team C will compare selected ratios, cash flow and make recommendations how both companies can manage cash flow for the future.
In order to get the best return on investment for a distressed real estate purchase one must consider many factors. These details include but are not limited to, the current and future state of the housing market for a given area, the cost of construction and related services, the median rental, lease or sale prices, the property taxes, the title cost and insurance, as well as any legal implications of the purchase and subsequent sale, lease or rental. Most importantly one must pose the question, “What is it that I hope to achieve from investing in a distressed property?”
The execution of our investment strategy occurred in three stages. First, we invested in t-bills and bonds according to our original set out investment plan. This was to decrease potential losses and risk associated with the declining equity market. Therefore, we invested about two hundred thousand of our funds into these low risk assets to maintain buying power. Due to inflation, we did not want to lose buying power by leaving funds in an account without earning interest. Further, we invested a small portion of funds into the commodity market. With a slumping equity market and a positive outlook on the gold commodity, we invested in Gold Corporation at the same time we invested in income assets.
Modigliania, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review.
I am currently majoring in Finance Management. Most of the time people think of finance as just managing money. However, finance is needed for so much more! The finance industry deals with starting businesses, developing new products, expanding markets, as well as everyday things like saving for retirement, purchasing a home, and even insurance. The stock market, asset allocation, portfolio analysis, and electronic commerce are all key aspects in finance. In this paper, I will explain how these features play a vital role in the industry, along with the issues that come with these factors.