Academia.eduAcademia.edu

Figure 1 – uploaded by She-I Chang

See full PDFdownloadDownload figure
Figure 1: Historical development of capital structure theory (here TA — traditional (empirical) approach, MM — Modigliani — Miller approach, BFO — Brusov—Filatova—Orekhova theory). perpetuity Modigliani—Miller approach to general capital structure theory — Brusov—Filatova—Orekhova (BFO) theory is shown.

Figure 1 Historical development of capital structure theory (here TA — traditional (empirical) approach, MM — Modigliani — Miller approach, BFO — Brusov—Filatova—Orekhova theory). perpetuity Modigliani—Miller approach to general capital structure theory — Brusov—Filatova—Orekhova (BFO) theory is shown.

Related Figures (11)

Figure 2: MM theory describes perpetuity limit, Myers paper describes one-year company while BFO theory fills the whole numeric axis (from n=1 up to perpetuity limit n =~ ). So, before 2008 only two results for capital structure of the company were available: Modigliani—Miller for perpetuity company and Myers for one-year company (see Figure 2). BFO theory has filled out whole interval between t=1 and t=. It gives the possibility to calculate the capitalization V, the weighted average cost of capital, WACC, equity cost k, and other financial parameters for companies of arbitrary age and for companies of arbitrary life-time. BFO theory has lead to a lot of new meaningful effects in modern capital structure theory, discussed in the monograph (Brusov et al., 2015; 2018).
Figure 2: MM theory describes perpetuity limit, Myers paper describes one-year company while BFO theory fills the whole numeric axis (from n=1 up to perpetuity limit n =~ ). So, before 2008 only two results for capital structure of the company were available: Modigliani—Miller for perpetuity company and Myers for one-year company (see Figure 2). BFO theory has filled out whole interval between t=1 and t=. It gives the possibility to calculate the capitalization V, the weighted average cost of capital, WACC, equity cost k, and other financial parameters for companies of arbitrary age and for companies of arbitrary life-time. BFO theory has lead to a lot of new meaningful effects in modern capital structure theory, discussed in the monograph (Brusov et al., 2015; 2018).
Figure 3: Dependence of company capitalization, UL, equity cost, ke, debt cost, ky, and weighted average cost of capital, WACC, in traditional (empirical) approach. Modigliani and Miller (MM) in their first paper (Modigliani and Miller 1958) have come to the conclusions which were fundamentally different from the conclusions of traditional approach. Under assumptions (see Sect. 2.3 for details) that there are no taxes, no transaction costs, no bankruptcy costs, perfect financial markets exist with symmetry information, equivalence in borrowing costs for both companies and investors, etc., they have showed that choosing of the ratio between the debt and equity capital does not affect company value as well as capital costs (Figure 3).
Figure 3: Dependence of company capitalization, UL, equity cost, ke, debt cost, ky, and weighted average cost of capital, WACC, in traditional (empirical) approach. Modigliani and Miller (MM) in their first paper (Modigliani and Miller 1958) have come to the conclusions which were fundamentally different from the conclusions of traditional approach. Under assumptions (see Sect. 2.3 for details) that there are no taxes, no transaction costs, no bankruptcy costs, perfect financial markets exist with symmetry information, equivalence in borrowing costs for both companies and investors, etc., they have showed that choosing of the ratio between the debt and equity capital does not affect company value as well as capital costs (Figure 3).
Most of Modigliani and Miller assumptions (Modigliani and Miller 1958), of course, are unrealisti Some assumptions can be removed without changi the conclusions of the model. However, assuming costs of bankruptcy and the absence of taxes (or presence of corporate taxes only) are crucial— he change of these assumptions alters conclusions. The last two assumptions rule out the possibility of signali ng theory and agency costs theory and, thus, a constitute a critical prerequisite (Figure 4). SO Figure 4: Dependence of equity cost ke and WACC on leverage level L within Modigliani—Miller theory without taxes. 2.2. Modigliani-Miller Theory with Taxes In the real situation, taxes on profit of companies always exist. Since the interest paid on debt are excluded from the tax base-it leads to the so-called effect of “tax shield”: value of the company that used the borrowed capital (leverage company) is higher than
Most of Modigliani and Miller assumptions (Modigliani and Miller 1958), of course, are unrealisti Some assumptions can be removed without changi the conclusions of the model. However, assuming costs of bankruptcy and the absence of taxes (or presence of corporate taxes only) are crucial— he change of these assumptions alters conclusions. The last two assumptions rule out the possibility of signali ng theory and agency costs theory and, thus, a constitute a critical prerequisite (Figure 4). SO Figure 4: Dependence of equity cost ke and WACC on leverage level L within Modigliani—Miller theory without taxes. 2.2. Modigliani-Miller Theory with Taxes In the real situation, taxes on profit of companies always exist. Since the interest paid on debt are excluded from the tax base-it leads to the so-called effect of “tax shield”: value of the company that used the borrowed capital (leverage company) is higher than
Figure 5: Dependence of equity capital cost, debt cost, an WACC on leverage in Modigliani—Miller theory without taxe (t=0) and with taxes (¢ #0). So, we get the following statement obtained by Modigliani and Miller (1963):
Figure 5: Dependence of equity capital cost, debt cost, an WACC on leverage in Modigliani—Miller theory without taxe (t=0) and with taxes (¢ #0). So, we get the following statement obtained by Modigliani and Miller (1963):
-igure 8: Dependence of company capitalization, V and WACC on leverage level in "classical" Modigliani—Miller theory (curve |' and curve 1) and in "modified" Modigliani—Miller theory (curve 2' and curve 2). Equating (9) and (11), we obtain
-igure 8: Dependence of company capitalization, V and WACC on leverage level in "classical" Modigliani—Miller theory (curve |' and curve 1) and in "modified" Modigliani—Miller theory (curve 2' and curve 2). Equating (9) and (11), we obtain
fable 1: Dependence of WACC on Leverage Level in "Classical" Modigliani—Miller Theory Table 2: Dependence of WACC on Leverage Level in Modified Modigliani—Miller Theory (MMM Theory) at kd=0.18
fable 1: Dependence of WACC on Leverage Level in "Classical" Modigliani—Miller Theory Table 2: Dependence of WACC on Leverage Level in Modified Modigliani—Miller Theory (MMM Theory) at kd=0.18
Figure 9: Dependence of equity cost of the company, ke, on leverage level in "classical" Modigliani—Miller theory (curve 2), in "modified" Modigliani—Miller theory (curve 3) and for financially independent company (t=0) (curve 1).
Figure 9: Dependence of equity cost of the company, ke, on leverage level in "classical" Modigliani—Miller theory (curve 2), in "modified" Modigliani—Miller theory (curve 3) and for financially independent company (t=0) (curve 1).
Table 3: Dependence of WACC on Leverage Level in Modified Modigliani—Miller Theory (MMM Theory) at kd=0.14 Table 4: Dependence of WACC on Leverage Level in modified Modigliani—-Miller Theory (MMM Theory) at kd=0.1
Table 3: Dependence of WACC on Leverage Level in Modified Modigliani—Miller Theory (MMM Theory) at kd=0.14 Table 4: Dependence of WACC on Leverage Level in modified Modigliani—-Miller Theory (MMM Theory) at kd=0.1
5. CONCLUSIONS
5. CONCLUSIONS
Related topics:
FinanceEconomicsMicroeconomicsAccounting
580 California St., Suite 400
San Francisco, CA, 94104
© 2025 Academia. All rights reserved