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Generalization of the Modigliani–Miller Theory for the Case of Variable Profit

Author

Listed:
  • Peter Brusov

    (Department of Mathematics, Financial University under the Government of Russian Federation, 117198 Moscow, Russia)

  • Tatiana Filatova

    (Department of Financial and Investment Management, Financial University under the Government of Russian Federation, 117198 Moscow, Russia)

  • Natali Orekhova

    (High Business School, Southern Federal University, 344090 Rostov-on-Don, Russia)

  • Veniamin Kulik

    (Deutsche Bank Ltd., 117198 Moscow, Russia)

  • She-I Chang

    (College of Management, National Chung Cheng University, Jiayi City 60078, Taiwan)

  • George Lin

    (College of Management, National Chung Cheng University, Jiayi City 60078, Taiwan)

Abstract

For the first time we have generalized the world-famous theory by Nobel Prize winners Modigliani and Miller for the case of variable profit, which significantly extends the application of the theory in practice, specifically in business valuation, ratings, corporate finance, etc. We demonstrate that all the theorems, statements and formulae of Modigliani and Miller are changed significantly. We combine theoretical and numerical (by MS Excel) considerations. The following results are obtained: (1) Discount rate for leverage company changes from the weighted average cost of capital, WACC, to WACC–g (where g is growing rate), for a financially independent company from k 0 to k 0 –g. This means that WACC and k 0 are no longer the discount rates as it takes place in case of classical Modigliani–Miller theory with constant profit. WACC grows with g, while real discount rates WACC–g and k 0 –g decrease with g. This leads to an increase of company capitalization with g. (2) The tilt angle of the equity cost k e (L) grows with g. This should change the dividend policy of the company, because the economically justified value of dividends is equal to equity cost. (3) A qualitatively new effect in corporate finance has been discovered: at rate g < g* the slope of the curve k e (L) turns out to be negative, which could significantly alter the principles of the company’s dividend policy.

Suggested Citation

  • Peter Brusov & Tatiana Filatova & Natali Orekhova & Veniamin Kulik & She-I Chang & George Lin, 2021. "Generalization of the Modigliani–Miller Theory for the Case of Variable Profit," Mathematics, MDPI, vol. 9(11), pages 1-24, June.
    • Handle: RePEc:gam:jmathe:v:9:y:2021:i:11:p:1286-:d:568243
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    References listed on IDEAS

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    Cited by:

    1. Peter Brusov & Tatiana Filatova & Natali Orekhova, 2023. "Capital Structure Theory: Past, Present, Future," Springer Books, in: The Brusov–Filatova–Orekhova Theory of Capital Structure, chapter 0, pages 9-50, Springer.
    2. Winifrida Mwanga & Adeoye Crispin John Mbogo, 2023. "Drivers of Weighted Average Cost of Capital in Selected Listed Companies in Tanzania," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(7), pages 1601-1618, July.
    3. Wang, Jingyi, 2024. "Green finance and the relationship with goodwill: A study based on the perspectives of accounting information quality and financing constraints," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 833-846.
    4. Peter Brusov & Tatiana Filatova & Natali Orekhova, 2023. "Generalization of the Brusov–Filatova–Orekhova Theory for the Case of Variable Income," Springer Books, in: The Brusov–Filatova–Orekhova Theory of Capital Structure, chapter 0, pages 265-290, Springer.

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