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

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  • Peter Brusov

    (Department of Mathematics, Financial University under the Government of Russian Federation, 125167 Moscow, Russia)

  • Tatiana Filatova

    (Department of Financial and Investment Management, Financial University under the Government of Russian Federation, 125167 Moscow, Russia)

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.

Suggested Citation

  • Peter Brusov & Tatiana Filatova, 2022. "Generalization of the Brusov–Filatova–Orekhova Theory for the Case of Variable Income," Mathematics, MDPI, vol. 10(19), pages 1-21, October.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:19:p:3661-:d:934636
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    References listed on IDEAS

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    1. Peter Brusov & Tatiana Filatova & Veniamin Kulik, 2023. "Two Types of Payments of Tax on Profit: Advanced Payments and at the End of Periods: Consideration within BFO Theory with Variable Profit," JRFM, MDPI, vol. 16(3), pages 1-20, March.

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