Benefits of Advance Payments of Tax on Profit: Consideration Within Brusov–Filatova–Orekhova (BFO) Theory

The modern capital cost and capital structure theory—Brusov–Filatova–Orekhova (BFO) theory and its perpetuity limit—Modigliani–Miller theory describe the case of the payments of income tax at the end of the year. But in practice companies could make these payments in advance. Recently, the Modigliani–Miller theory has been modified for the case of advanced payments of income tax and has shown that obtained results are quite different from the ones in “classical” Modigliani–Miller theory. In the current chapter, for the first time we modify the Brusov–Filatova–Orekhova (BFO) theory for the case of advanced payments of income tax and show that the impact of the transition to advance payments is much more significant than in the case of a perpetuity limit (the MM theory) and even leads to a qualitatively new effect on the dependence of equity cost on leverage. An important conclusion drawn in this chapter is that the tax shield is very important and the way it is formed (payments at the end of the year or in advance) leads to very important consequences, changing all the financial indicators of the company, such as the cost of raising capital and company value and radically changing the company’s dividend policy.