Application of the Modigliani–Miller Theory, Modified for the Case of Advance Payments of Tax on Profit, in Rating Methodologies


  • P.N. Brusov Department of Mathematics, Financial University under the Government of Russian Federation, Moscow, Russia
  • T.V. Filatova Department of financial and investment management, Financial University under the Government of Russian Federation. Moscow, Russia
  • N.P. Orekhova High Business school, Southern Federal University, Rostov–on–Don. Russia
  • V.L. Kulik Deutsche Bank Ltd. Moscow, Russia
  • S.-I. Chang College of Management, National Chung Cheng University, Taiwan
  • Y.C.G. Lin College of Management, National Chung Cheng University, Taiwan


Modified Modigliani–Miller theory, Brusov–Filatova–Orekhova (BFO) theory, advance payments of tax on profit, rating methodologies.


During a couple years we have suggested a new approach to rating methodology of non–financial issuers, as well for project rating. The key factors of a new approach are: 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 modern theory of capital structure (Brusov–Filatova–Orekhova (BFO) theory) and into its perpetuity limit.

Recently we have generalized the Modigliani and Miller theory for a more realistic method of payments of tax on profit: for the case of advance payments of tax on profit, which is widely used in practice. Modigliani – Miller theory accounts these tax payments as annuity–immediate, while in practice these payments are making in advance and thus should be accounting as annuity–due. We have shown that this generalization leads to some important consequences, which change seriously all the main statements by Modigliani and Miller.

In current paper we use the modified Modigliani – Miller theory (MMM theory) and apply it for rating methodologies needs. A serious modification of MMM theory in order to use it in rating procedure has been required. The financial "ratios" were incorporated into MMM theory. The dependence of the weighted average cost of capital (WACC), which plays the role of discount rate, on coverage and leverage ratios is analyzed.

 Obtained results make possible to use the power of this theory in the rating and create a new base for rating methodologies.