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

Authors

  • P.N. Brusov Financial University
  • T.V. Filatova Financial University
  • N.P. Orekhova Institute of Business, Management and Low

DOI:

https://doi.org/10.6000/1929-7092.2013.02.15

Keywords:

Taxes, company capital cost and capital structure, leverage, Modigliani–Miller theory, Brusov – Filatova – Orekhova theory

Abstract

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

At some ratios between cost of debt and cost of equity the discovered effect takes place at profit tax rate, existing in western countries and Russia. This provides the practical meaning of discussed effect. Its accounting is important at modification of tax low and can change the dividend policy of the company.

In paper the complete and detailed investigation of discussed effect, discovered within Brusov – Filatova – Orekhova theory (BFO 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% (profit tax rate is situated in â€non– financial†region).

Author Biographies

P.N. Brusov, Financial University

Applied Mathematics Department

T.V. Filatova, Financial University

State and Municipal Governance Department

N.P. Orekhova, Institute of Business, Management and Low

Head of Financial and Economical Technology Department

References

Brusov P., Filatova T., Orekhova N., Brusova N. 2011a. Weighted average cost of capital in the theory of Modigliani-Miller, modified for a finite life-time company. Applied Financial Economics. V. 21(11), pp. 815-824.
http://dx.doi.org/10.1080/09603107.2010.537635
Brusov Peter, Filatova Tatiana, Orekhova Natalia, Mukhadin Eskindarov, Brusov Pavel, Brusova Nastia, 2011b. Influence of debt financing on the effectiveness of the finite duration investment project. Applied Financial Economics, 22(?11), 1043-1052.
Brusov P., Filatova T., Orekhova N., Brusov P.P., Brusova N. 2011c. From Modigliani-Miller to general theory of capital cost and capital structure of the company. Research Journal of Economics, Business and ICT. V. 2, pp. 16-21.
Brusov Peter, Filatova Tatiana, Orekhova Natalia, Brusov Pavel, Brusova Nastia, 2011d. Influence of debt financing on the effectiveness of the investment project within the Modigliani-Miller theory, Research Journal of Economics, Business and ICT, v.2 (UK).
Brusov Peter, Filatova Tatiana, Mukhadin Eskindarov, Orekhova Natalia, 2012. Hidden global causes of the global financial crisis. Journal of Reviews on Global Economics, V.1, pp.106-111.
Brusov Peter, Filatova Tatiana, Orekhova Natalia, 2013a. Absence of an Optimal Capital Structure in the Famous Tradeoff Theory! Journal of Reviews on Global Economics, V. 2, pp. 94-117.
Brusov P.N., Filatova ?.?. 2011a, Financial management, V. I-III, ?.: KNORUS.
Brusov P.N., Filatova ?. V. 2011b. From Modigliani-Miller to general theory of capital cost and capital structure of the company, Finance and credit, V. 435 ?3, pp. 2-8.
Brusov P.N., Filatova ?. V. 2011c. Cost of capital and capital structure in post Modigliani-Miller approach, «Financial analysis: problems and solutions», V. 79, ? 37.
Peter Brusov, Tatiana Filatova, Natali Orekhova, 2013b, Modern corporative finance and investment, KNORUS, 540 p.
Brusov P.N., Filatova ?.V., Orekhova N.P., Brusova ?.P. 2011e. General theory of capital cost and capital structure: beyond the theory of Modigliani-Miller // Bulletin of the FU, ? 2, pp. 32-36. ? 3.
Filatova ?.V., Orekhova N.P., Brusova ?.P. 2008. Weighted average cost of capital in the theory of Modigliani-Miller, modified for a finite life-time company // Bulletin of the FU, ? 4, pp. 74-77.
Modigliani F., Miller M. 1958. The Cost of Capital, Corporate Finance and the Theory of Investment // American Economic Review. Vol. 48. ? 4, pp. 261-297.
Modigliani F., Miller M. 1963. Corporate Income Taxes and the Cost of Capital: A Correction // American Economic Review. Vol. 53. ? 3. pp. 147-175.
Modigliani F., Miller M. 1966. Some estimates of the Cost of Capital to the Electric Utility Industry 1954-1957 // American Economic Review, pp. 261-297.
Myers S. 2001.Capital Structure //Journal of Economic Perspectives. Vol. 15. ? 2 pp. 81-102

Downloads

Published

2013-05-28

How to Cite

Brusov, P., Filatova, T., & Orekhova, N. (2013). A Qualitatively New Effect in Corporative Finance: Abnormal Dependence of Cost of Equity of Company on Leverage. Journal of Reviews on Global Economics, 2, 183–193. https://doi.org/10.6000/1929-7092.2013.02.15

Issue

Section

Articles

Most read articles by the same author(s)