Modern Corporate Finance, Investments and Taxation by Peter Brusov, Tatiana Filatova, Natali Orekhova, Mukhadin

By Peter Brusov, Tatiana Filatova, Natali Orekhova, Mukhadin Eskindarov

This monograph is dedicated to the trendy idea of capital expense and capital constitution and its software to the true financial system. specifically, it provides a potential clarification to the explanations of worldwide monetary situation. The authors of the ebook alter the speculation of Nobel Prize winners Modigliani and Miller to explain an alternate conception of capital expense and capital constitution that may be utilized to firms with arbitrary lifetime and funding tasks with arbitrary period. The authors illustrate their thought with examples from company perform and increase funding types that may be utilized through businesses of their monetary operations.

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The time of existence. A lot of schemes of termination of activities of the company can exist: bankruptcy, merger, acquisition, etc. Below we consider one of those schemes, when the value of the debt capital D becomes zero at the time of termination of activity of company n: in this case the BFO theory requires minimal upgrades, showed below. 1), it is easy to get an estimation for the “residual capitalization” of the company, discounted to the time moment k: Vk ¼ n X t¼kþ1 i CF CF h ÀðnÀkÞ 1 À ð 1 þ WACC Þ ¼ : ð1 þ WACCÞt WACC ð3:42Þ Using the formula V k ¼ wd D; ð3:43Þ we obtain an expression for the tax shield for n years subject to the termination of the activities of the company at the moment n: n tkd wd CF X 1 À ð1 þ WACCÞÀðnÀkþ1Þ ¼ k WACC k¼1 ð1 þ k d Þk k¼1 ð1 þ k d Þ !

The first four formulas from the right-hand column are sometimes used in practice, but there are several significant nuances. First—these formulas do not take account of the residual value of the company, and only take into account the operating flows and this must be borne in mind. Second—these formulas contain the weighted average cost of capital of the company, WACC. If it is estimated within the traditional approach or the theory of Modigliani–Miller, it gives a lower WACC value, than the real, and, therefore, overestimates the capitalization of both financially dependent and financially independent companies.

In this way, the financial capital structure is more influenced by investors, the expectations of which are taken into account by managers Leverage level is determined by market dynamics. Equity market timing theory means that company should issue shares at high price and repurchase them at low price. The idea is to exploit temporary fluctuations in the equity cost relative to the cost of other forms of capital In order to save costs and to avoid errors, financial capital structure can be formed not on the basis of the calculations of optimal capital structure or depending on available in different periods of company life funding sources, but borrow from other companies that have successful, reputable managers (companies’ leaders), as well as using (in the wake of the majority) the most popular methods of management of capital structure 24 2 Capital Structure: Modigliani–Miller Theory References 25 References Brusov PN, Filatova ТV (2011) From Modigliani–Miller to general theory of capital cost and capital structure of the company.

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