From Modigliani–Miller To General Theory Of Capital Cost And Capital Structure Of The Company
One of the serious limitations of the Modigliani–Miller theory
is the suggestion about perpetuity of the companies. We lift
up this limitation and show, that the accounting of the finite
lifetime of the company leads to change of the equity cost,
k as well as of the weighted average cost of capital,
WACC, in the presence of corporative taxes. We give a
rigorous proof of the Brusov–Filatova theorem, that in the absence of corporative taxes cost of company equity, , as well as its weighted average cost, WACC, do not depend
on the lifetime or age of the company. We show that
perpetuity ModiglianiMiller theory underestimates the equity
cost , as well as the weighted average cost of capital,
WACC, and thus underestimates the financial risks, which
could become one of the implicit reasons for the financial crisis
Peter Brusov, Tatiana Filatova, Natali Orehova, Nastia Brusova, Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite life–time company, Applied Financial Economics, v.21(7) 2011.
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