Advertisement

A Qualitatively New Effect in Corporate Finance: Abnormal Dependence of Equity Cost of Company on Leverage

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

Abstract

Qualitatively new effect in corporative finance has been discovered by the authors: decreasing of equity cost ke with leverage L. This effect, which is absent in perpetuity Modigliani–Miller limit, takes place on account of finite age of the company at tax on profit rate, which exceeds some value T*.

At some ratios between debt cost and equity cost, the discovered effect takes place at tax on profit rate existing in Western countries and Russia. This provides the practical meaning of the discussed effect. Taking it into account is important for the modification of tax law and can change the dividend policy of the company.

In this chapter, the complete and detailed investigation of the discussed effect, discovered within Brusov–Filatova–Orekhova theory, has been done. It has been shown that the absence of the effect at some particular set of parameters is connected to the fact that in these cases, T* exceeds 100% (tax on profit rate is situated in “nonfinancial” region).

References

  1. Brusova A (2011) А comparison of the three methods of estimation of weighted average cost of capital and equity cost of company. Financ Anal Prob Sol 34(76):36–42Google Scholar
  2. Brusov PN, Filatova ТV (2011) From Modigliani–Miller to general theory of capital cost and capital structure of the company. Finance and Credit 435:2–8Google Scholar
  3. Brusov P, Filatova T, Orehova N, Brusova A (2011a) Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite life–time company. Appl Financ Econ 21(11):815–824CrossRefGoogle Scholar
  4. Brusov P, Filatova T, Orehova N, Brusov PP, Brusova N (2011b) From Modigliani–Miller to general theory of capital cost and capital structure of the company. Res J Econ Bus ICT 2:16–21Google Scholar
  5. Brusov P, Filatova T, Orehova N et al (2011c) Influence of debt financing on the effectiveness of the investment project within the Modigliani–Miller theory. Res J Econ Bus ICT (UK) 2:11–15Google Scholar
  6. Brusov P, Filatova T, Eskindarov M, Orehova N (2012a) Influence of debt financing on the effectiveness of the finite duration investment project. Appl Financ Econ 22(13):1043–1052CrossRefGoogle Scholar
  7. Brusov P, Filatova T, Eskindarov M, Orehova N (2012b) Hidden global causes of the global financial crisis. J Rev Global Econ 1:106–111Google Scholar
  8. Brusov P, Filatova P, Orekhova N (2013a) Absence of an optimal capital structure in the famous tradeoff theory! J Rev Global Econ 2:94–116Google Scholar
  9. Brusov P, Filatova T, Orehova N (2013b) A qualitatively new effect in corporative finance: abnormal dependence of equity cost of company on leverage. J Rev Global Econ 2:183–193Google Scholar
  10. Brusov P, Filatova P, Orekhova N (2014a) Mechanism of formation of the company optimal capital structure, different from suggested by trade off theory. Cogent Econ Finance 2:1–13.  https://doi.org/10.1080/23322039.2014.946150 CrossRefGoogle Scholar
  11. Brusov P, Filatova T, Orehova N (2014b) Inflation in Brusov–Filatova–Orekhova theory and in its perpetuity limit–Modigliani–Miller theory. J Rev Global Econ 3:175–185CrossRefGoogle Scholar
  12. Brusov P, Filatova T, Orehova N, Eskindarov M (2015) Modern corporate finance, investment and taxation, 1st edn. Springer, Berlin, pp 1–368CrossRefGoogle Scholar
  13. Brusov P, Filatova T, Orehova N, Kulk V, Weil I (2018a) New meaningful effects in modern capital structure theory. J Rev Global Econ 7:104–122CrossRefGoogle Scholar
  14. Brusov P, Filatova T, Orehova N, Kulk V (2018b) A “golden age” of the companies: conditions of its existence. J Rev Global Econ 7:88–103CrossRefGoogle Scholar
  15. Brusov P, Filatova T, Orehova N, Kulk V (2018c) Rating methodology: new look and new horizons. J Rev Global Econ 7:63–87CrossRefGoogle Scholar
  16. Brusov P, Filatova T, Orehova N, Kulk V (2018d) Rating: new approach. J Rev Global Econ 7:37–62CrossRefGoogle Scholar
  17. Filatova Т, Orehova N, Brusova А (2008) Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite life–time company. Bull FU 48:68–77Google Scholar
  18. Мodigliani F, Мiller M (1958) The cost of capital, corporate finance, and the theory of investment. Am Econ Rev 48:261–297Google Scholar
  19. Мodigliani F, Мiller M (1963) Corporate income taxes and the cost of capital: a correction. Am Econ Rev 53:147–175Google Scholar
  20. Modigliani F, Miller M (1966) Some estimates of the cost of capital to the electric utility industry 1954–1957. Am Econ Rev 56:333–391Google Scholar
  21. Myers S (2001) Capital structure. J Econ Perspect 15(2):81–102CrossRefGoogle Scholar

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

Personalised recommendations