Abstract
The theory of the capital cost and the capital structure by Modigliani and Miller (MM) is based on many assumptions, removal of which significantly alters its conclusions. While the account of corporate and individual taxes, the possibility of bankruptcy and a number of other assumptions have received considerable attention, the MM assumption that all financial flows are perpetuity (the lifetime of the company is infinite) is much less studied. In fact, the lifetime of the company is always, of course, finite and the inclusion of this significantly changes formulae obtained by MM, in particular for the Weighted Average Cost of Capital (WACC). In this article, we consider the WACC of the company in the theory of MM and modify MM's theory for a finite lifetime company. For the first time, we derive the analytical expression for WACC of the company with arbitrary lifetime. In two limited cases – 1 year and perpetuity companies – our expression gives the well-known results of Myers and MM, correspondingly. We...
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