BFO Theory with Variable Profit in Case of Advance Payments of Tax on Profit

Authors

  • Peter Brusov Department of Mathematics, Financial University under the Government of Russian Federation, Moscow, Russia
  • Tatiana Filatova Department of Financial and Investment Management, Financial University under the Government of Russian Federation, Moscow, Russia
  • Veniamin Kulik Deutsche Bank Ltd., 117198 Moscow, Russia

DOI:

https://doi.org/10.6000/1929-7092.2023.12.01

Keywords:

Generalized BFO theory, variable income, advance tax on income payments, company value, WACC, cost of equity

Abstract

The Brusov–Filatova–Orekhova (BFO) theory is generalized for the simultaneous account of variable company profit and advance tax on income payments. The generalized BFO formula for the WACC, has been derived. The dependence of WACC, discount rate, WACC–g (here g is growth rate), company capitalization, V, the equity cost, ke, on leverage L at various values of g, on debt cost, kd, and on age of the company, n, is studied. It is shown, that WACC, is no longer a discount rate. This role passes to WACC–g, which decreases with g, while the company's value increases with g. The tilt of curve k(L) growths with g. It is found that at the growth rate g < g* the tilt of the curve ke(L) is negative. This changes significantly the company's dividend policy principles. WACC(L) as well as the discount rate, WACC–g, decrease with the increase of debt cost kd. V (L) at all values of kd increases with leverage L, as well V(L) increases with kd. This means that tax shield advantages the decrease of the cost of raising capital. Examining the main financial parameters of the company at the positive (g=0.2) and negative (g=–0.2) growth rates, we found a huge difference in their behavior. This allows you to explore companies with growing profits and companies with decreasing profits, as well investigate the financial state of the companies whose profits rise and fall in different periods.

References

Angotti, M.; de Lacerda Moreira, R.; Hipólito Bernardes do Nascimento, J.; Neto de Almeida Bispo, O. Analysis of an equity investment strategy based on accounting and financial reports in Latin American markets. Reficont 2018, 5, 22-40.

Barbi, M. On the risk-neutral value of debt tax shields. Appl. Financ. Econ. 2011, 22, 251-258. https://doi.org/10.1080/09603107.2011.613754

Becker, D.M. Getting the valuation formulas right when it comes to annuities. Manag. Financ. 2022, 48, 470. https://doi.org/10.1108/MF-03-2021-0135

Berk, J.; DeMarzo, P. Corporate Finance, Boston: Pearson-Addison Wesley 2007.

Bradley, M.; Jarrell, G.A.; Kim, E.H. On the Existence of an Optimal Capital Structure: Theory and Evidence, Journal of Finance 1984, 39, pp. 857-878. https://doi.org/10.1111/j.1540-6261.1984.tb03680.x

Brusov P.; Filatova T.; Orehova N. Ratings: Critical Analysis and New Approaches of Quantitative and Qualitative Methodology; Springer Nature Publishing: Switzerland, 2020; pp.1-369. https://www.springer.com/de/book/9783030562427

Brusov P.; Filatova T.; Orehova N.; Eskindarov M. Modern corporate finance, investments, taxation and ratings; 2nd ed.; Springer Nature Publishing, Switzerland, 2018; pp.1-571. https://doi.org/10.1007/978-3-319-99686-8

Brusov, P.; Filatova, T.; Orehova, N.; The Brusov-Filatova-Orekhova theory of capital structure: Applications in Corporate Finance, Investments, Taxation and Ratings, Springer Nature Publishing: Switzerland, 2023; pp. 1–723. https://doi.org/10.1007/978-3-030-93893-2_1

Brusov, P.; Filatova, T. The Modigliani-Miller theory with arbitrary frequency of payment of tax on profit. Mathematics 2021, 9, 1198. https://doi.org/10.3390/math9111198

Brusov, P.N.; Filatova, T.V.; Orekhova, N.P.; Kulik, V.L.; Chang, S.I.; Lin, Y.C.G. Generalization of the Modigliani-Miller Theory for the Case of Variable Profit. Mathematics 2021, 9(11), 1286. https://doi.org/10.3390/math9111286

Dimitropoulos, P. Capital structure and corporate governance of soccer clubs: European evidence. Manag. Res. Rev. 2014, 37, 658-678. https://doi.org/10.1108/MRR-09-2012-0207

El-Chaarani, H.; Abraham, R.; Skaf, Y. The Impact of Corporate Governance on the Financial Performance of the Banking Sector in the MENA (Middle Eastern and North African) Region: An Immunity Test of Banks for COVID-19. J. Risk Financ. Manag. 2022, 15, 82. https://doi.org/10.3390/jrfm15020082

Farber, A.; Gillet, R.; Szafarz, A. A General Formula for the WACC. International Journal of Business 2006, 11/2, pp. 211-218.

Fernandez, P.; A General Formula for the WACC: a Comment. International Journal of Business 2006, 11/2, p. 219. https://doi.org/10.2139/ssrn.949464

Franc-Dąbrowska, J.; Mądra-Sawicka, M.; Milewska, A. Energy Sector Risk and Cost of Capital Assessment—Companies and Investors Perspective. Energies 2021, 14, 1613. https://doi.org/10.3390/en14061613

Frank, M.; Goyal, V. Capital Structure Decisions: Which Factors Are Reliably Important? Financial Management 2009, 38(1), pp.1-37. https://doi.org/10.1111/j.1755-053X.2009.01026.x

Graham, J. R. Taxes and Corporate Finance: A Review, Review of Financial Studies 2003, 16, pp.1075-1129. https://doi.org/10.1093/rfs/hhg033

Hamada R. Portfolio Analysis, Market Equilibrium, and Corporate Finance, Journal of Finance 1969, 24(1), pp. 13-31. https://doi.org/10.1111/j.1540-6261.1969.tb00339.x

Harris, R.; Pringle, J. Risk-Adjusted Discount Rates - Extension form the Average-Risk Case. The Journal of Financial Research 1985, 8/3, pp. 237-244. https://doi.org/10.1111/j.1475-6803.1985.tb00406.x

Harry, D.A.; Masulis R.W. Optimal Capital Structure under Corporate and Personal Taxation. Journal of Financial Economics 1980, 8, pp. 3-29. https://doi.org/10.1016/0304-405X(80)90019-7

Luiz, K.; Cruz, M. The relevance of capital structure on firm performance: A multivariate analysis of publicly traded Brazilian companies. REPeC Brasília 2015, 9, 384-401.

Miller M. Debt and taxes. The Journal of Finance 1977, 32(2), pp.261-275. https://doi.org/10.1111/j.1540-6261.1977.tb03267.x

Modigliani F.; Miller M. Some estimates of the cost of capital to the electric utility industry 1954-1957. Am Econ Rev 1966, 56, pp. 333-391. https://doi.org/10.1108/QRFM-02-2020-0019

Mundi, H.S.; Kaur, P.; Murty, R.L.N. A qualitative inquiry into the capital structure decisions of overconfident finance managers of family-owned businesses in India. Qual. Res. Financ. Mark. 2022, 14, 357-379.

Peter, Brusov.; Tatiana, Filatova, Capital Structure Theory: Past, Present, Future Mathematics 2023, 11(3), 616. https://doi.org/10.3390/math11030616

Peter, Brusov.; Tatiana, Filatova, Generalization of the Brusov-Filatova-Orekhova Theory for the Case of Variable Income. Mathematics 2022, 10, 3661. https://doi.org/10.3390/math10193661

Peter, Brusov; Tatiana, Filatova; Natali, Orekhova; Veniamin, Kulik; Chang, S.-I.; George, Lin. The Generalization of the Brusov-Filatova-Orekhova Theory for the Case of Payments of Tax on Profit with Arbitrary Frequency. Mathematics 2022, 10, 1343. https://doi.org/10.3390/math10081343

Sadiq, M.; Alajlani, S.; Hussain, M.S.; Bashir, F.; Chupradit, S. Impact of credit, liquidity, and systematic risk on financial structure: Comparative investigation from sustainable production. Environ. Sci. Pollut. Res. Int. 2022, 29, 20963-20975. https://doi.org/10.1007/s11356-021-17276-x

Sheridan, T.; Wessels, R. The Determinants of Capital Structure Choice. Journal of Finance 1988, 43, pp. 1-19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x

Vergara-Novoa, C.; Sepúlveda-Rojas, J.P.; Miguel, D.A.; Nicolás, R. Cost of Capital Estimation for Highway Concessionaires in Chile. J. Adv. Transp. 2018, 2018, 2153536. https://doi.org/10.1155/2018/2153536

Мodigliani F.; Мiller M. Corporate income taxes and the cost of capital: a correction. Am Econ Rev 1963, 53, pp. 147-175

Мodigliani F.; Мiller M. The cost of capital, corporate finance, and the theory of investment. Am Econ Rev 1958, 48, pp. 261-297.

Downloads

Published

2023-02-08

How to Cite

Brusov, P. ., Filatova, T. ., & Kulik, V. . (2023). BFO Theory with Variable Profit in Case of Advance Payments of Tax on Profit. Journal of Reviews on Global Economics, 12, 1–17. https://doi.org/10.6000/1929-7092.2023.12.01

Issue

Section

Articles

Most read articles by the same author(s)