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

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 chapter is to bring 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, the weighted average cost of capital, WACC, and equity cost, ke, depend on the frequency of tax on profit payments. It turns out that the increase in the number of payments of tax of profit per year leads to a decrease in the cost of attracting capital, WACC and increase in the company value, 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, ke(L), decreases with an increase of 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. More frequent payments of income tax are beneficial for both parties—for the company and for the tax regulator: for the company, this leads to an increase in the value of the company, and for the tax regulator, earlier payments are beneficial due to the time value of money.