Abstract
Application of the Modigliani–Miller Theory, Modified for the Case of Advance Payments of Tax on Profit, in Rating Methodologies
Highlights
In our previous papers (Brusov et al 2018; 2019; 2020b) we have applied the theory of Nobel Prize winners Modigliani and Miller, which is the perpetuity limit of the general theory of capital cost and capital structure – Brusov–Filatova–Orekhova (BFO) theory (Brusov et al 2011; 2014; 2015; 2018) for rating needs
These consequencies are as following: weighted average cost of capital (WACC) starts depend on debt cost kd, WACC turns out to be lower than in case of classical Modigliani–Miller theory and company capitalization becomes higher than in ordinary Modigliani–Miller theory.We show that equity dependence on leverage level L is still linear, but the tilt angle with respect to L–axis turns out to be smaller: this could lead to modification of the divident policy of the company
This means that systematic risks arising from the use of modified Modigliani – Miller theory (MMM theory) in practice is higher than it was suggested by the "classical" version of this theory
Summary
In our previous papers (Brusov et al 2018; 2019; 2020b) we have applied the theory of Nobel Prize winners Modigliani and Miller, which is the perpetuity limit of the general theory of capital cost and capital structure – Brusov–Filatova–Orekhova (BFO) theory (Brusov et al 2011; 2014; 2015; 2018) for rating needs It has become a very important step in developed of a qualitatively new rating methodology. We have shown that this generalization leads to some important consequencies, which change seriously all the main statements by Modigliani and Miller (Мodigliani and Мiller, 1958; 1963; 1966) These consequencies are as following: WACC starts depend on debt cost kd, WACC turns out to be lower than in case of classical Modigliani–Miller theory and company capitalization becomes higher than in ordinary Modigliani–Miller theory.We show that equity dependence on leverage level L is still linear, but the tilt angle with respect to L–axis turns out to be smaller: this could lead to modification of the divident policy of the company. Obtained results make possible to use the power of this theory in the rating and create a new base for rating methodologies, by other words this allows develop a new approach to methodology of rating, requiring a serious modification of existing rating methodologies
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