Influence of Tax Rates on Ownership Type : Debt Choice, Valuation, and Leverage Gain

Abstract

After assigning the same before-tax cash flows and costs of borrowing, we examine the influence of tax rates on ownership type by computing valuation and leverage gain outcomes for debt choices. After determining the optimal debt-to-firm value ratios (ODVs) for each ownership type, we compare outcomes using no growth versus growth and different market risk scenarios. Despite being taxed differently, nonprofits and for-profits have very similar OD Vs but nonprofits get more benefit from growth. Even without an interest tax shield, nonprofits gain more in absolute dollars from leverage. For a growth nonprofit, the gain is also true in percentage terms.