Nonprofits and Pass-Throughs: Performance Comparison

dc.contributor.authorVan Dalsem, Shane
dc.contributor.authorHull, Robert M.en_US
dc.dateNovember 2020
dc.description.abstractNonprofits (NPs) resemble pass-throughs (PTs) in size. While not profit-seeking like PTs, NPs should still seek to achieve maximum firm value (max VL). Using a historical growth rate of 3.12% and the same risk class, we find the following. NPs obtain a max VL that is 51.63% greater than PTs. NPs achieve a 13.83% increase when going from a nongrowth max VL to a growth max VL compared to only 3.42% for PTs and NPs do this with a before-tax plowback ratio that is 26.63% lower than PTs. Such growth-related achievements occur because NPs, unlike PTs, are not taxed on retained earnings used for growth. In terms of the maximum gain to leverage (max GL), we find that NPs gain 2.25% less in dollars added from debt. However, if greater growth occurs under TCJA, NPs gain more and not less. Despite having 12.27% greater optimal debt-to-firm value ratios than PTs, the maximum percentage change in unlevered firm value (max %l\.Eu) from debt is 37.32% less for NPs. Even with greater growth, the max %l\.Eu is substantially less for NPs. NP's ability to profit more from growth and achieve less relative gain from debt can be attributed to their tax-exempt status.en_US
dc.description.sponsorshipKaw Valley Banken_US
dc.identifier.otherSchool of Business Working Paper Series; No. 235en_US
dc.publisherWashburn University. School of Businessen_US
dc.subjectSmall businessen_US
dc.subjectCorporations - Financeen_US
dc.subjectPass-through businessesen_US
dc.titleNonprofits and Pass-Throughs: Performance Comparisonen_US
dc.typeWorking Paperen_US
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