Application of the Modigliani–Miller Theory, Modified for the Case of Advance Payments of Tax on Profit, in Rating Methodologies

Recently we have modified the theory of Nobel Prize winners Modigliani and Miller (MM theory), which is a perpetuity limit case of the general theory of capital cost and capital structure—Brusov–Filatova–Orekhova theory (BFO theory), into two ways: we apply it for rating methodology needs and later we generalized it for the case of advance payments of tax on profit, which is widely used in practice (MMM theory). In the current chapter, we use the modified Modigliani–Miller theory (MMM theory) and apply it for rating methodology needs. The financial “ratios” (main rating parameters) were introduced into MMM theory. The dependence of the weighted average cost of capital (WACC), which plays the role of discount rate in financial flows discounting in rating methodologies, on coverage and leverage ratios is analyzed. Obtained results will help improve the existing rating methodologies. A couple of years ago, we have suggested a new approach to rating methodology of non-financial issuers, as well as for project rating (for long-term projects as well as for projects of arbitrary duration) (Brusov et al. Modern corporate finance, investments, taxation and ratings. Springer, 2018a; J Rev Glob Econ 7:37–62, 2018b; J Rev Glob Econ 7:88–103, 2018c; J Rev Glob Econ 7:63–829, 2018d; J Rev Glob Econ 7:104–122, 2018e; J Rev Glob Econ 7:360–376, 2018f; Modern corporate finance and investments, monograph. Knorus Publishing House, 2018g; J Rev Glob Econ 8:437–448, 2019; J Rev Glob Econ 9:257–268, 2020b). The key factors of a new approach are: (1) The adequate use of discounting of financial flows virtually not used in existing rating methodologies, (2) The incorporation of rating parameters (financial “ratios”) into the modern theory of capital structure (Brusov–Filatova–Orekhova (BFO) theory) (Brusov et al. 2011, 2014, 2015; Modern corporate finance, investments, taxation and ratings. Springer, 2018a; J Rev Glob Econ 7:37–62, 2018b; J Rev Glob Econ 7:88–103, 2018c; J Rev Glob Econ 7:63–829, 2018d; J Rev Glob Econ 7:104–122, 2018e; J Rev Glob Econ 7:360–376, 2018f; Modern corporate finance and investments, monograph. Knorus Publishing House, 2018g; J Rev Glob Econ 8:437–448, 2019) and into its perpetuity limit.