What is Cost of Equity? – Meaning, Concept and Formula
April 3, 2025
Theoretical Concept The cost of equity concept is very important when it comes to valuing shares on the stock market. Equity, like all other investment classes expects a compensation to be paid to its investors. The problem however is that unlike debt and other classes the cost of equity is never really straightforward. You can…
The geographical boundaries drawn by nation states are blurring in the 21st century. In many parts of the world, free movement of goods, services, and even personnel have become a norm. However, strangely, the concept of credit and loans is still dependent upon national boundaries. The H1B visa system of America is a testimony to…
Wall Street is very sensitive to communication. Every quarter, executives from top companies communicate their results to the street. Based on the content of this communication, the market reacts. Sometimes the market turns volatile. However, at other times the market remains stable. Apart from the content being communicated, the manner in which it is also…
The holding company-subsidiary company corporate structure is extremely popular all across the world. All large companies serve as holding companies. For instance, Apple Inc. is a holding company which is registered in the United States. Apple has several subsidiaries all across the world. Companies like Apple China and Apple Russia are registered in their respective countries.
This structure is used by all multinational companies in the world. They have subsidiary companies which conduct business in different parts of the globe and then send their profits back to the holding corporation. This structure has become popular because there are several tax and operational benefits that accrue as a result of this structure.
In this article, we will have a closer look at some of the main benefits that are associated with having a holding company.
A holding corporation is a parent corporation. This means that the holding corporation owns majority shares in other companies. As a result, the holding company can appoint the board of directors of the subsidiary company. This means that the holding corporation is in complete control of the policies and workings of the subsidiary company.
Also, since the holding company owns majority stock in the operations of the subsidiary company, it can receive the profits from transfer it to the parent company. Based on the needs of the shareholders, the profits can either be retained in the subsidiary company or they can be transferred using the holding company. Thus, the holding company structure provides flexibility to the shareholders.
The holding company structure allows the parent company to lend back the same money that was received as profits. The money can be lent out in the form of a secured loan. In some cases, the subsidiary companies enter into agreements with the holding company. These companies give the holding company, the priority right to seize the assets of the subsidiary company in the event of a default. This structure allows the company to protect the interest of its shareholders over the interest of creditors. It is for this reason, that this structure has been considered to be controversial and many lawsuits have been filed citing the misuse of this structure.
This strategy is used to transfer the maximum amount of earnings to the holding company. Since the holding company pays very low taxes, the structure becomes extremely tax efficient. Companies like Amazon are known for using the holding company structure to build a competitive advantage in the form of sustained low income tax payments which translate into lower costs.
To sum it up, the holding company structure has several benefits. However, a lot of these benefits only accrue to companies that have a significant turnover. Hence, this strategy may not be applicable to smaller companies.
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