Rating Methodology: New Look and New Horizons

Authors

  • P.N. Brusov Department of Data Analysis, Decision Making, and Financial Technology, Financial University under the Government of Russian Federation, Moscow
  • T.V. Filatova Department of Corporate Finance and Corporate Governance, Financial University under the Government of Russian Federation, Moscow
  • N.P. Orekhova High Business School, Southern Federal University, Rostov-on-Don
  • V.L. Kulik Department of Management, Financial University under the Government of Russian Federation, Moscow

Keywords:

Rating, rating methodology, discounting of financial flows, coverage ratios, leverage ratios., Brusov-Filatova-Orekhova theory

Abstract

In the previous paper a new approach to rating methodology has been suggested. Key factors of a new approach were the following: 1) The adequate use of discounting of financial flows virtually not used in existing rating methodologies, 2) The incorporation of rating parameters (financial "ratios") into the perpetuity limit of modern theory of capital structure (Brusov-Filatova-Orekhova (BFO) theory): for companies with infinite lifetime.

In current paper further development of a new approach has been done. We have generalized it for the general case of modern theory of capital structure (Brusov-Filatova-Orekhova (BFO) theory): for companies of arbitrary age. A serious modification of BFO theory in order to use it in rating procedure has been required. It allows to apply obtained results for real economics, where all companies have finite lifetime, introduce a factor of time into theory, estimate the creditworthiness of companies of arbitrary age (or arbitrary lifetime), introduce discounting of the financial flows, using the correct discount rate etc. This allows use the powerful tools of BFO theory in the rating. All these create a new base for rating methodologies.

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Published

2018-03-09

Issue

Section

Special Issue - RECENT DEVELOPMENT OF CAPITAL STRUCTURE THEORY AND ITS APPLICATIONS