From Modigliani–Miller To General Theory Of Capital Cost And Capital Structure Of The Company

Abstract

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

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 52 citations exist upstream.