A “Golden Age” of the Companies: Conditions of Its Existence

Abstract

A few years ago, we have discovered the effect of the “golden age” of the company (Brusov et al., Modern corporate finance, investments and taxation, monograph, 1st edn. Springer, Berlin, 2015a, J Rev Global Econ, 4: 21–42, 2015b): it was shown for the first time that valuation of the weighted average cost of capital, WACC, in the Modigliani–Miller theory (Modigliani and Мiller, Am Econ Rev 48: 261–297, 1958, Am Econ Rev 53: 147–175, 1963, Am Econ Rev 56: 333–391, 1966) is not minimal and valuation of the company capitalization is not maximal, as all financiers supposed up to this discovery; at some age of the company, its WACC value turns out to be lower than in Modigliani–Miller theory, and company capitalization V turns out to be greater than V in Modigliani–Miller theory. It was shown that, from the point of view of cost of attracting capital, there are two types of dependences of weighted average cost of capital, WACC, on the company age n: monotonic descending with n and descending with passage through minimum, followed by a limited growth. In practice there are companies with both types of dependences of WACC on the company age n.

In this chapter we continue to study this problem and investigate which companies have the “golden age,” i.e., obey the latter type of dependence of WACC on n (Brusov et al., J Rev Global Econ 7:88–103, 2018b). With this aim we study the dependence of WACC on the age of company n at various leverage levels within a wide spectrum of capital costs values as well as the dependence of WACC on leverage level L at fixed company age n. All calculations have been done within modern theory of capital cost and capital structure BFO by Brusov–Filatova–Orekhova (Brusov and Filatova, Finance Credit 435: 2–8, 2011; Brusov et al. Appl Financ Econ 21(11): 815–824, 2011a, Res J Econ Bus ICT 2: 16–21, 2011b, Res J Econ Bus ICT 2: 11–15, 2011c, Appl Financ Econ 22 (13): 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, Modern corporate finance, investments and taxation, monograph, 1st edn, Springer, Berlin, 2015a, J Rev Global Econ, 4: 21–42, 2015b, J Rev Global Econ 7:104–122, 2018a, J Rev Global Econ 7:88–103, 2018b, J Rev Global Econ 7:63–87, 2018c, J Rev Global Econ 7:37–62, 2018d; Filatova et al., Bull FU 48: 68–77, 2008).

We have shown that existence of the “golden age” of the company does not depend on the value of capital costs of the company, but depends on the difference between equity k ₀ and debt k _d costs. The “golden age” of company exists at small enough difference between k ₀ and k _d costs, while at high value of this difference, the “golden age” of the company is absent: curve WACC(n) monotonic descends with n. For the companies with the “golden age,” curve WACC(L) for perpetuity companies lies between curves WACC(L) for company ages n = 1 and n = 3, while for the companies without the “golden age,” curve WACC(L) for perpetuity companies is the lowest one.

In our paper (Brusov et al., Modern corporate finance, investments and taxation, monograph, 1st edn, Springer, Berlin, 2015a, J Rev Global Econ, 4: 21–42, 2015b), we have found also a third type of WACC(n) dependence: descending with passage through minimum, which lies below the perpetuity limit value, and then going through maximum followed by a limited descending. We called this effect “Kulik effect.” In this chapter we have found a variety of “Kulik effect”: descending with passage through minimum of WACC, which lies above the perpetuity limit value, and then going through maximum followed by a limited descending. We call this company age, where WACC has a minimum, which lies above the perpetuity limit value, “a silver age” of the company