The Generalization of the Brusov–Filatova–Orekhova Theory for the Case of Payments of Tax on Profit with Arbitrary Frequency

Peter Brusov, Tatiana Filatova, Natali Orekhova, Veniamin Kulik, She-I Chang and George Lin
Additional contact information
Tatiana Filatova: Department of Financial and Investment Management, Financial University under the Government of Russian Federation, 125167 Moscow, Russia
Natali Orekhova: High Business School Southern Federal University, 344006 Rostov-on-Don, Russia
Veniamin Kulik: Deutsche Bank, 125047 Moscow, Russia
She-I Chang: College of Management, National Chung Cheng University, Chiayi 621301, Taiwan
George Lin: College of Management, National Chung Cheng University, Chiayi 621301, Taiwan

Mathematics, 2022, vol. 10, issue 8, 1-19

Abstract: Both main theories of capital cost and capital structure—the Brusov–Filatova–Orekhova (BFO) theory and its perpetuity limit, the Modigliani–Miller theory—consider the payments of tax on profit once per year, while in real economy these payments are made more frequently (semi-annual, quarterly, monthly etc.). Recently the Modigliani–Miller theory has been generalized by us for the case of tax on profit payments with an arbitrary frequency. Here for the first time, we generalized the Brusov–Filatova–Orekhova (BFO) theory for this case. The main purpose of the paper is bringing the BFO theory closer to economic practice, taking into account one of the features of the real functioning of companies, the frequent payments of tax on profit. We derive modified BFO formulas and show that: (1) All BFO formulas change; (2) all main financial parameters of the company, such as company value, V, equity cost, k e , and the weighted average cost of capital, WACC , depend on the tax on profit payments frequency. The increase of the frequency of payments of income tax leads to a decrease in the cost of attracting capital, WACC , and increase in the capitalization of the company, V . At a certain age n of the company and at certain frequency of tax on profit payments p , a qualitatively new anomalous effect takes place: the equity cost, k e ( L ), decreases with an increase in the level of leverage L . This radically changes the company?s dividend policy, since the economically justified amount of the dividends is equal to the cost of equity. For both parties–for the company and for the tax regulator more frequent payments of tax on profit are beneficial: for the company, because this increases the company capitalization, and for the tax regulator, because earlier payments are beneficial for it due to the time value of money.

Keywords: generalized Brusov–Filatova–Orekhova (BFO) theory; frequency of payment of income tax; the Modigliani–Miller theory; the weighted average cost of capital; the equity cost; the 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 (3)

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Chapter: The Generalization of the Brusov–Filatova–Orekhova Theory for the Case of Payments of Tax on Profit with Arbitrary Frequency (2023)
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