Generalization of the Brusov–Filatova–Orekhova Theory for the Case of Variable Income

Peter Brusov and Tatiana Filatova ()
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Tatiana Filatova: Department of Financial and Investment Management, Financial University under the Government of Russian Federation, 125167 Moscow, Russia

Mathematics, 2022, vol. 10, issue 19, 1-21

Abstract: To expand the applicability in practice of the modern theory of cost and capital structure, the theory of Brusov–Filatova–Orekhova (BFO), which is valid for companies of arbitrary age, is generalized for the case of variable income. The generalized theory of capital structure can be successfully applied in corporate finance, business valuation, banking, investments, ratings, etc. income. A generalized Brusov–Filatova–Orekhova formula for the weighted average cost of capital, WACC , is derived using a formula in MS Excel, where the role of the discount rate shifts from WACC to WACC – g (here g is the growth rate) for financially dependent companies and k 0 – g for financially independent companies is shown. A decrease in the real discount rates of WACC – g and k 0 – g with g ensures an increase in the company’s capitalization with g . The tilt of the equity cost curve, k e ( L ), increases with g . Since the cost of equity justifies the amount of dividends, this should change the dividend policy of the company. It turns out that for the growth rate g < g *, the tilt of the curve k e ( L ) becomes negative. This qualitatively new effect, discovered here for the first time, can significantly change the principles of the dividend policy of the company. The obtained results are compared with the results of the MM theory with variable income.

Keywords: generalized Brusov–Filatova–Orekhova theory; growth rate; variable income; company’s capitalization; the weighted average cost of capital; WACC; equity cost (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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Chapter: Generalization of the Brusov–Filatova–Orekhova Theory for the Case of Variable Income (2023)
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