capital structure: Impact of Lower Corporate Tax Rate

Capital structure: Tax Rate

Using the Economatica system, we explore capital structure, equity beta, and asset beta across sectors to show the impact of today’s lower corporate rate.

We used the Economatica system to calculate the Capital Structure (D/D+E)), Equity Beta (levered), and Asset Beta (unlevered) for all sectors comprised of 20 companies or more. In total, there were 1,835 companies traded on NYSE, Nasdaq, and Amex, sampled in this analysis.

Comparing the Asset Beta with the 35% tax rate to the Asset Beta with the 21% tax rate reveals that the highest impacted sectors are Support Activities from Mining, which drops from 1.16 to 1.08, Retail Trade, which drops from 0.84 to 0.77, and Aerospace Product and Parts Manufacturing, dropping from 0.85 to 0.78.

The sectors with the highest Equity Beta are Support Activities for Mining and Residential Building Construction, both coming in with a value of 1.42.  The sector with the highest Asset Beta is Pharmaceutical and Medicine Manufacturing, with a value of 1.34 considering the new tax rate of 21%, or 1.35 considering the tax rate of 35%.

The sector with the lowest Equity Beta is Electric Power Generation, Transmission and Distribution, with 0.37, which also happens to be the sector with the lowest Asset Beta with 0.24 and 0.26 respectively when considering the tax rates of 21% and 35%.

We also examine the concentration of companies by their Equity Beta and Asset Beta (using 21% tax rate) metrics. The chart below shows that the highest concentration of companies by both metrics are in the 0.76 – 1.0 beta range. The second highest concentration of companies is found in the 0.51 – 0.75 range for Asset Beta, and 1.01 – 1.25 for the Equity Beta. Please see the chart below for additional details.

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