By Peter Brusov, Tatiana Filatova, Natali Orekhova, Mukhadin Eskindarov
This monograph is dedicated to the trendy idea of capital fee and capital constitution and its software to the genuine financial system. specifically, it provides a potential rationalization to the reasons of worldwide monetary quandary. The authors of the publication regulate the idea of Nobel Prize winners Modigliani and Miller to explain another concept of capital expense and capital constitution that may be utilized to enterprises with arbitrary lifetime and funding tasks with arbitrary period. The authors illustrate their idea with examples from company perform and boost funding types that may be utilized by way of businesses of their monetary operations.
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The time of existence. A lot of schemes of termination of activities of the company can exist: bankruptcy, merger, acquisition, etc. Below we consider one of those schemes, when the value of the debt capital D becomes zero at the time of termination of activity of company n: in this case the BFO theory requires minimal upgrades, showed below. 1), it is easy to get an estimation for the “residual capitalization” of the company, discounted to the time moment k: Vk ¼ n X t¼kþ1 i CF CF h ÀðnÀkÞ 1 À ð 1 þ WACC Þ ¼ : ð1 þ WACCÞt WACC ð3:42Þ Using the formula V k ¼ wd D; ð3:43Þ we obtain an expression for the tax shield for n years subject to the termination of the activities of the company at the moment n: n tkd wd CF X 1 À ð1 þ WACCÞÀðnÀkþ1Þ ¼ k WACC k¼1 ð1 þ k d Þk k¼1 ð1 þ k d Þ !
We have the following equation for WACC in n-year case: 3 Modern Theory of Capital Cost and Capital Structure: Brusov–Filatova-. . 30 1 À ð1 þ WACCÞÀn À AðnÞ ¼ 0; WACC ð3:12Þ Where, AðnÞ ¼ 1 À ð1 þ k0 ÞÀn : k0 ½1 À ωd T ð1 À ð1 þ kd ÞÀn Þ ð3:13Þ The algorithm of the solving of the Eq. 12) should be as follows: 1. Putting the values of parameters k0, ωd, T and given n, we calculate A(n); 2. 12) has opposite signs. It is obvious that as these two values we can use WACC1 and WACC1 , because WACC1 > WACCn > WACC1 for finite n !
Here, D is the value of debt capital; kd the cost of debt capital; and T the tax on profit rate. Next, we use the Modigliani–Miller theorem (Modigliani and Miller 1958, 1963, 1966): The value of financially dependent company is equal to the value of the company of the same risk group used no leverage, increased by the value of tax shield arising from financial leverage, and equal to the product of rate of corporate income tax T and the value of debt D. V ¼ V 0 þ DT : ð3:2Þ This theorem was formulated by Modigliani and Miller for perpetuity companies, but we modify it for a company with a finite lifetime.