A Study On Real Estate Financing Structure Optimization In Henan Province

The real estate industry plays a significant role and is at a very important place in China’s urbanization progress. The effect of the real estate industry’s long-term, stable and rapid development on the national economy is tremendous. This paper starts from the perspective of real estate financing structure and studies the development of the real estate industry, hoping to promote the healthy development of real estate industry by optimizing the financing structure.This paper conducts research on the real estate industry in Henan province based on the optimization of financing structure. Seen from the theories of financing structure, since MM Theorem put forward by Modigliani and Miller, modern corporate financing structure theories have achieved considerable development and become a central content of the academic research. The original MM Theorem had many assumptions, such as zero transaction cost, equal average rate of profit in each enterprise, all dividends for distribution and debts without default risks. Under these assumptions, MM Theorem came to the conclusion that an enterprise’s value had nothing to do with the financing structure. We find that this conclusion does not conform to reality, but MM Theorem has provided a direction and framework as the theoretical study. After that, MM Theorem was revised and took the influence of enterprise income tax into consideration. An enterprise’s interest paid by the debt financing can be deducted from the enterprise income tax payable, which means that debt financing can bring about tax benefits to the enterprise. It drew the conclusion that the enterprise value would be maximized when an enterprise manages in the full use of eternal loan. This conclusion does not accord with reality, either, because theoretical assumptions contain that the enterprise has no management risk or the risk of debt default. The subsequent corporate financing structure theories relaxed further assumptions and developed Balance Theory, New Pecking order Theory, Agency Cost Theory and Corporate Control Theory. Balance Theory added the enterprise’s management risk and debt repayment risks and costs into the theory model and concluded that an enterprise’s optimal capital structure was the balance between bankruptcy cost and tax revenue. New Pecking order Theory incorporated information asymmetry into the financing structure theory for study and thought the enterprise financing was conducted in a certain order, namely internal financing first and then external financing. This financing order was confirmed in American enterprises’ financing structures at that time. Agency Cost Theory was based on the interest conflicts between an enterprise’s shareholders and professional managers and between shareholders and creditors and put forward concepts of equity agency cost and debt agency cost. When the weighted average of the two reached the minimum, the enterprises would realize the optimal financing structure. Corporate Control Theory assumed that the contract that shareholders and professional manager signed was incomplete and further analyzed its influence on corporate control based on the exposition of the agency cost theory on equity agency cost. Due to conflicts of interest existed between professional managers and shareholders, shareholders were likely to corporate rights of control in the case of incomplete contract. This theory believes that increasing debt financing and supervising with the creditors can make shareholders get more business management information. From a theoretical standpoint, the optimal financing structure does exist. According to the theories of financing structure, this paper regards the balance of debt yields and bankruptcy cost and the tradeoff of stock rights and creditor’s rights as the standards to analyze the real estate financing structure optimization in Henan province.The theoretical optimal level of financing structure is the basis of analysis in this paper and the base to analyze the real estate industry’s capital operational modes and characteristics and financing instruments that real estate enterprises in Henan province have selected. This paper has comprehensively analyses operational modes and characteristics, sorted out the operation procedures and main contents and summarized that its capital operation possesses features of considerable development capital investment, long project development cycle, high cost of development and large risk of investment. According to these characteristics, the author has elaborated the financing modes and primary financing instruments in the real estate industry and further analyzed the impacts of the financing modes on the financing structure.To find problems that exist in the real estate financing structure of Henan province clearly and objectively, this paper adopts the method of empirical analysis, is based on the selected asset-liability ratio, current liabilities ratio and long-term debt ratio, establishes the analysis model and conducts regression analysis combined with the selected sample enterprise data. The author finds that the asset-liability ratio index has an obvious positive correlation with return on equity, which means that an enterprise can get higher yields by improving liabilities level. This is consistent with the theory of financing structure. In the analyses of the return on total assets and the asset-liability ratio, the author finds that the two have showed a negative correlation, indicating that the enterprise may encounter higher financial risk and interest expense if it obtains too large proportion of financing by means of the obligatory right in the financing structure. Although no significant conclusions have been drawn in analyses of current liabilities ratio and long-term debt ratio like the asset-liability ratio, negative correlations between the long-term debt ratio and other seven factors can also indicate that enterprises have the preference of debt financing, especially the short-term debt financing.In the research on enterprises’ financing structure optimization, this paper has been more inclined to adopt comparing capital cost method, EPS(earnings per share) analysis method and cash flow analysis to determine the optimal proportion of financing structure. Based on the theoretical analysis, this research selects asset-liability ratio, current liabilities ratio and long-term debt ratio and eight selected factors to establish the model, conduct regression analysis and then objectively identify problems, which is the innovation of this paper. However, the author does not conduct multidimensional and systematical analysis of the dynamic characteristics of the optimal financing structure which needs to be further studied.