Natali Orekhova

Absence of an Optimal Capital Structure in the Famous Tradeoff Theory

Within modern theory of capital structure and capital cost by Brusov-Filatova-Orekhova the analysis of wide known tradeoff theory has been made. It is shown that suggestion of risky debt financing (and growing credit rate near the bankruptcy) in opposite to waiting result does not lead to growing of weighted average cost of capital, WACC, which still decreases with leverage. This means the absence of minimum in the dependence of WACC on leverage as well as the absence of maximum in the dependence of company capitalization on leverage. Thus, it seems that the optimal capital structure is absent in famous tradeoff theory. The explanation to this fact has been done

Hidden Global Causes of the Global Financial Crisis

Hopes of ending the financial crisis did not materialize. Recent events (the problems of the euro zone, the threat of default in the U.S., the collapse of the financial market after a reduction of the credit rating of the U.S., debt problems in the world (Europe, U.S.), U.S. fiscal cliff, etc.) show that the crisis deepened, affecting new areas and taking on a systemic character. It becomes clear that we need in-depth analysis of its general, systemic causes. This article examines recent results in this field, obtained by scientists of Finance University under the Russian Federation Government

Mechanism of formation of the company optimal capital structure, different from suggested by trade off theory

Abstract Under condition of proved by us insolvency of well-known classical trade off theory it becomes important to identify mechanisms for forming the optimal capital structure of a company. This paper presents one of the real such mechanisms based on the decrease of debt cost with leverage, which is determined by growth of debt volume. This mechanism is absent in perpetuity Modigliani–Miller theory, even in modified version, developed by us, and exists within more general modern theory of capital cost and capital structure by Brusov–Filatova–Orekhova, or BFO theory..

A Qualitatively New Effect in Corporative Finance: Abnormal Dependence of Cost of Equity of Company on Leverage

Qualitatively new effect in corporative finance is discovered: decreasing of cost of equity ke with leverage L. This effect, which is absent in perpetuity Modigliani–Miller limit, takes place under account of finite lifetime of the company at profit tax rate, which exceeds some value T*. At some ratios between cost of debt and cost of equity the discovered effect takes place at profit tax rate, existing in western countries and Russia. This provides the practical meaning of discussed effect. Its accounting is important at modification of tax low and can change the dividend policy of the company. In paper the complete and detailed investigation of discussed effect, discovered within Brusov – Filatova – Orekhova theory (BFO theory), has been done. It has been shown, that the absence of the effect at some particular set of parameters is connected to the fact, that in these cases T* exceeds 100% (profit tax rate is situated in ”non– financial” region)

New Meaningful Effects in Modern Capital Structure Theory

Paper is devoted to describe the new meaningful effects in capital structure theory, discovered within modern theory of capital cost and capital structure, created by Brusov, Filatova and Orekhova (BFO theory). These qualitatively new effects are present in general version of BFO theory and absent in its perpetuity limit (Modigliani – Miller theory). BFO theory has changed some main existing principles of financial management. Discovered effects modify our understanding of financial management and dictate some unusual managerial decisions.

Investment Models with Uniform Debt Repayment and Their Application

In previous chapters, we have established investment models with debt repayment at the end of the project, well proven in the analysis of real investment projects. In practice, however, a scheme of uniform debt repayment during the duration of the project is more extended. In this chapter, we describe new investment models with uniform debt repayment during the duration of the investment project, quite adequately describing real investment projects. Within these models it is possible, in particular, to analyze the dependence of effectiveness of investment projects on debt financing and taxation. We will work on the modern theory of capital cost and capital structure developed by Brusov–Filatova–Orekhova (Brusov and Filatova 2011; Brusov et al. 2011a, b, c, 2012a, b, 2013a, b, 2014a, b; Filatova et al. 2008; Brusova 2011) as well as on perpetuity limit (Мodigliani and Мiller 1958, 1963, 1966).

Is It Possible to Increase the Investment Efficiency by Increasing Tax on Profit Rate? An Abnormal Influence of the Growth of Tax on Profit Rate on the Efficiency of the Investment

Within the modern theory of capital cost and capital structure by Brusov–Filatova–Orekhova (BFO theory) (Brusov and Filatova 2011; Brusov et al. 2011a, b, c, 2012a, b, 2013a, b, 2014a, b; Filatova et al. 2008; Brusova 2011) and modern investment models created within this theory, the influence of the growth of tax on profit rate on the efficiency of the investment is investigated. It has been shown that for long-term investment projects, as well as for arbitrary duration projects, the growth of tax on profit rate changes the nature of the NPV dependence on leverage at some value t*: there is a transition from the diminishing function NPV(L), when t < t*, to the growing function NPV(L). The t* value depends on the duration of the project, cost of capital (equity and debt) values, and other parameters of the project.

Bankruptcy of the Famous Trade-Off Theory

Within modern theory of capital cost and capital structure by Brusov–Filatova–Orekhova (Brusov and Filatova 2011; Brusov et al. 2011a, b, c, 2012a, b, 2013a, b, 2014a, b; Filatova et al. 2008), the analysis of wide-known trade-off theory has been made. It is shown that suggestion about risky debt financing (and about growth of credit rate near the bankruptcy) in opposite to waiting result does not lead to growth of weighted average cost of capital, WACC, which still decreases with leverage. This means the absence of minimum in the dependence of WACC on leverage as well as the absence of maximum in the dependence of company capitalization on leverage. Thus, it means that the optimal capital structure is absent in famous trade-off theory. The explanation to this fact has been done.

Is It Possible to Increase Taxing and Conserve a Good Investment Climate in the Country

Within investment models, developed by Brusov, Filatova, and Orekhova earlier (Brusov and Filatova 2011; Brusov et al. 2011a, b, c, 2012a, b, 2013a, b, 2014a, b; Filatova et al. 2008; Brusova 2011), the influence of tax on profit rate on effectiveness of long-term investment projects at different debt levels is investigated. It is shown that increase of tax on profit rate from one side leads to decrease of project NPV, but from other side, it leads to decrease of sensitivity of NPV with respect to leverage level. At high leverage level L, the influence of tax on profit rate increase on effectiveness of investment projects becomes significantly less. We come to conclusion, that taxing could be differentiated depending on debt level of investment projects of the company: for projects with high debt level L, it is possible, in principle, to apply a higher tax on profit rate.

Capital Structure: Modigliani–Miller Theory

Under the capital structure, one understands the relationship between equity and debt capital of the company. Does capital structure affect the company’s main settings, such as the cost of capital, profit, value of the company, and the others, and, if affects, how? Choice of an optimal capital structure, i.e., a capital structure, which minimizes the weighted average cost of capital, WACC, and maximizes the value of the company, V, is one of the most important tasks solved by financial manager and by the management of a company. The first serious study (and first quantitative study) of influence of capital structure of the company on its indicators of activities was the work by Modigliani and Miller (1958). Until this study, the approach existed (let us call it traditional), which was based on empirical data analysis.