Research On The Value Of Debt Tax Shield About A Real Estate Company

According to the income tax law, interest expenses arise from bank loans，bondfinancing or other debt financing can be deducted. Accordance with the provisions,interest form debt financing can be deduced before income tax, thereby generatingincome tax credit, which is commonly referred as debt tax shield. Debt tax shieldmeans that companies can increase the amount of debt financing to get tax-savingeffect. Actually, the tax deductions of the enterprises are undertaken by thegovernment. That rule not only reflects the business alienation of the government, butalso shows the encouragement debt financing.On the one hand, the whole Chinese real estate companies’ average corporate taxburden is too high. On the other hand, after read "Chinese Real Estate StatisticsYearbook", we found that, in recent years, the annual growth rate of Chinese realestate business’ capital demand is over20%, sometimes even more than40%. Whichshows that the demand of funds are too great. Under the extremely high corporateincome tax burden, the real estate companies are looking for more tax-efficient ways.However, if we can increase the ratio of financing debt during financing, the value ofthe tax shield will undoubtedly reduce tax burden effectively.In this paper, a typical real estate company was selected to identify the generalregularity. Currently, there are few papers study the value of debt tax shield for singlecompany. In this article, I intend to research around the case company. Firstly, thecompany and its financing situation is briefly explained, according those informationto analysis its income tax burden, the tax shield of debt financing and the tax savingeffect. Secondly, evaluate the related status indicators to reveal the tax shieldapplication of the company, and by weighing the value of debt tax shield financialleverage and financial risk elected the best capital structure to maximize thecompany’s consolidated income; Finally, according to the analysis of the casecompany, we summed up some advices of how to use the value of the debt tax shieldeffectively and hoping those advices can be a reference for other corporates. Thispaper is mainly study the value of tax shield raised by debt financing and how to usetax shield effectively.