A Qualitatively New Effect in Corporate Finance: Abnormal Dependence of Equity Cost of Company on Leverage

Peter Brusov, Tatiana Filatova and Natali Orekhova
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Tatiana Filatova: Financial University under the Government of Russian Federation
Natali Orekhova: Financial University under the Government of Russian Federation

Chapter Chapter 9 in The Brusov–Filatova–Orekhova Theory of Capital Structure, 2023, pp 163-183 from Springer

Abstract: Abstract Qualitatively new effect in corporative finance is discovered: decreasing of cost of equity ke with leverage L. This effect, which is absent in perpetuity Modigliani–Miller limit, takes place under account of finite lifetime of the company at tax on profit rate, which exceeds some value T*. At some ratios between cost of debt and cost of equity the discovered effect takes place at tax on profit rate, existing in western countries and Russia. This provides the practical meaning of discussed effect. Its accounting is important at modification of tax low and can change the dividend policy of the company.

Keywords: Brusov–Filatova–Orekhova (BFO) theory; Debt financing; The weighted average cost of capital; Equity cost; Debt cost; Company capitalization; A qualitatively new effect in corporate finance (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-27929-4_9

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DOI: 10.1007/978-3-031-27929-4_9

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