Tatiana Filatova

Influence of debt financing on the effectiveness of the finite duration investment project

The problem of the influence of debt financing on the effectiveness of the arbitrary duration investment project is studied and quantitative results are obtained for the first time. The effectiveness of the investment project is considered from two perspectives: the owners of equity and debt and equity holders only. It was shown, that NPV practically always decreases with leverage in case of a constant value of equity, and the maximum leverage level, at which the project is still effective (NPV > 0), was found. In case of a constant value of the total invested capital it is possible an increase of NPV with leverage as well as its decrease, depending on the relation between the parameters of the project.

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

Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite lifetime company

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 MMs 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 have solved the obtained equation for a 2 year company and compared this result with those of Myers and MM. It shows that WACC values for 2 year company is closer to MM (perpetuity) limit than to Myers (1 year) one at small equity cost (just above the debt cost) while at bigger equity cost, it is closer to Myers limit than to MM one. Algorithm for finding of WACC in the case of arbitrary lifetime of the project has been developed. The use of the obtained equations for the projects of n years, and for companies operating in the market n years significantly alters the assessment of the WACC of the company.

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)

Inflation in Brusov–Filatova–Orekhova Theory and in Its Perpetuity Limit—Modigliani–Miller Theory

In this chapter, the influence of inflation on capital cost and capitalization of the company within modern theory of capital cost and capital structure—Brusov–Filatova–Orekhova theory (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 within its perpetuity limit—Modigliani–Miller theory (Мodigliani and Мiller 1958, 1963, 1966) is investigated. By direct incorporation of inflation into both theories, it is shown for the first time that inflation not only increases the equity cost and the weighted average cost of capital, but as well it changes their dependence on leverage. In particular, it increases the growing rate of equity cost with leverage. Capitalization of the company is decreased under inflation (Fig. 9.1).

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.