Benefits of Advance Payments of Tax on Profit: Consideration within the Brusov–Filatova–Orekhova (BFO) Theory

Peter Brusov, Tatiana Filatova and Veniamin Kulik
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Tatiana Filatova: Department of Financial and Investment Management, Financial University under the Government of Russian Federation, 125167 Moscow, Russia
Veniamin Kulik: Deutsche Bank Ltd., 117198 Moscow, Russia

Mathematics, 2022, vol. 10, issue 12, 1-13

Abstract: The modern capital cost and capital structure theory—the Brusov–Filatova–Orekhova (BFO) theory and its perpetuity limit, the Modigliani–Miller theory—describe the case of the payments of income tax at the end of the year. However, in practice, companies could make these payments in advance. Recently, the Modigliani–Miller theory has been modified for the case of advanced payments of income tax and has shown that the obtained results are quite different from ones in the “classical” Modigliani–Miller theory. In the current paper, for the first time, we modify the Brusov–Filatova–Orekhova (BFO) theory for the case of advanced payments of income tax and show that the impact of the transition to advance payments is much more significant than in the case of a perpetuity limit (the MM theory) and even leads to a qualitatively new effect in the dependence of equity cost on leverage. An important conclusion drawn in this paper is that the tax shield is very important, and the way it is formed (payments at the end of the year or in advance) leads to very important consequences, changing all the financial indicators of the company, such as the cost of raising capital and company value and radically changing the company’s dividend policy.

Keywords: Generalized Brusov–Filatova–Orekhova (BFO) theory; the Modigliani–Miller theory; advance payments of income tax; equity cost; the weighted average cost of capital; company capitalization; a qualitatively new anomalous effect (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Chapter: Benefits of Advance Payments of Tax on Profit: Consideration Within Brusov–Filatova–Orekhova (BFO) Theory (2023)
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