The Modigliani–Miller Theory with Arbitrary Frequency of Payment of Tax on Profit

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, 49 Leningradsky Prospekt, 125993 Moscow, Russia

Mathematics, 2021, vol. 9, issue 11, 1-25

Abstract: The main purpose of the current study is the generalization and further development of the Modigliani–Miller theory taking into account one of the conditions of the real functioning of companies for the case of paying income tax with an arbitrary frequency (monthly, quarterly, semi-annual or annual payments). While a return is not required more than once a year, businesses may be responsible for filing estimated taxes based on profits earned. This requirement is dependent on showing a profit. For example, sole proprietors must file estimated taxes on profits quarterly, on the 15th day of April, June, September and January. In Russia, tax on profit payments could be made annually, quarterly, or monthly. We suppose, that more frequent payment of income tax impacts on all main financial indicators of the company and leads to some important consequences. We use analytical and numerical methods: we derive all main formulas of the modified Modigliani–Miller theory theoretically and then use them to obtain all main financial indicators of company and their dependences on different parameters by MS Excel. We show that: (1) all Modigliani–Miller theorems, statements and formulas change; (2) all main financial indicators, such as the weighted average cost of capital ( WACC ), company value, V , and equity cost, k e , depend on the frequency of tax on profit payments; (3) in the case of income tax payments more than once per year (at p ? 1 ), as takes place in practice, the WACC , company value, V and equity cost, and k e start depend on debt cost, k d , while in ordinary (classical) Modigliani–Miller theory all these values do not depend on k d ; (4) obtained results allow a company to choose the number of payments of tax on profit per year (of course, within actual tax legislation): more frequent payments of income tax are beneficial for both parties, for the company and for the tax regulator.

Keywords: modified Modigliani–Miller theory; frequency of payment of tax on profit; equity cost; the weighted average cost of capital; company value (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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