Influence Of Debt Financing On The Effectiveness Of The Investment Project Within The Modigliani–Miller Theory

Peter N. Brusov · Natali Orekhova · Nastia Brusova

43 citations0/0 files storedResearch journal of economics, business and ICT

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Corporate Finance and Governance Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

Abstract

We study the problem of the influence of debt financing on the effectiveness of the investment project within the theory of Modigliani–Miller and obtain quantitative results for the first time. The effectiveness of the investment project is considered from two perspectives: the owners of equity and debt and equity holders only. It was shown, that NPV practically always decreases with leverage in case of a constant value of equity, and the maximum leverage level, at which the project is still effective ( NPV> 0), was found. In case of a constant value of the total invested capital it is possible an increase of NPV with leverage as well as its decrease, depending on the relation between the parameters of the project.

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References

2011Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite lifetime company

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