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Influence of Debt Financing on the Efficiency of Investment Projects: The Analysis of Efficiency of Investment Projects Within the Perpetuity (Modigliani–Miller) Approximation

  • Peter Brusov
  • Tatiana Filatova
  • Natali Orekhova
  • Mukhadin Eskindarov
Chapter

Abstract

In this chapter, we conduct the analysis of effectiveness of investment projects within the perpetuity (Modigliani–Miller) approximation (Мodigliani and Мiller, Am Econ Rev 48:261–297, 1958, Am Econ Rev 53:147–175, 1963, Am Econ Rev 56:333–391, 1966). Based on the obtained in previous chapter results for NPV (Brusov and Filatova, Finance Credit 435:2–8, 2011; Brusov et al., Appl Financ Econ 21:815–824, 2011a, Res J Econ Bus ICT 2:16–21, 2011b, Res J Econ Bus ICT (UK) 2:11–15, 2011c, Appl Financ Econ 22:1043–1052, 2012a, J Rev Global Econ 1:106–111, 2012b, J Rev Global Econ 2:94–116, 2013a, J Rev Global Econ 2:183–193, 2013b, Cogent Econ Finance 2:1–13, 2014a, J Rev Global Econ 3:175–185, 2014b; Filatova et al., Bull FU 48:68–77, 2008; Brusova, Financ Anal Prob Sol 34:36–42, 2011), we analyze the effectiveness of investment projects for three cases:
  1. 1.

    At a constant difference between equity cost (at L = 0) and debt cost Δk = k0kd

     
  2. 2.

    At a constant equity cost (at L = 0) and varying debt cost kd

     
  3. 3.

    At a constant debt cost kd and varying equity cost (at L = 0) k0

     

The dependence of NPV on investment value and/or equity value will be also analyzed. The results are shown in the form of tables and graphs.

It should be noted that the obtained tables have played an important practical role in determining the optimal or acceptable debt level, at which the project remains effective. There is an optimal debt level for the situation, when in the dependence of NPV on leverage level L there is an optimum (leverage level value, at which NPV reaches a maximum value). There is an acceptable debt level for the situation, when NPV decreases monotonically with leverage. And, finally, it is possible that NPV is growing with leverage. In this case, an increase in borrowing leads to increased effectiveness of investment projects, and their limit is determined by financial sustainability of investing company.

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Copyright information

© Springer Nature Switzerland AG 2018

Authors and Affiliations

  • Peter Brusov
    • 1
  • Tatiana Filatova
    • 1
  • Natali Orekhova
    • 2
  • Mukhadin Eskindarov
    • 1
  1. 1.Financial University under the Government of Russian FederationMoscowRussia
  2. 2.Center of Corporate Finance, Investment, Taxation and RatingsThe Research Consortium of Universities of the South of RussiaRostov-on-DonRussia

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