15. A “Silver Age” of the Companies. Conditions of Existence of “Golden Age” and “Silver Age” Effects

In this chapter, we continue to study the effect of the “golden age” of the company, which we described in Chap. 14. As it was shown for the first time (Brusov et al., Modern corporate finance, investments and taxation. Springer International Publishing, Switzerland, 373 p. monograph. SCOPUS, 2015), the valuation of the weighted average cost of capital, WACC, in the Modigliani–Miller theory (Modigliani et al. 1958, 1963, 1966) is not minimal and valuation of the company capitalization is not maximal, as all financiers assumed up to this discovery: at some age of the company, its WACC value turns out to be lower than in the Modigliani–Miller theory, and company capitalization V turns out to be greater than V in the Modigliani–Miller theory. It was shown that, from the point of view of cost of attracting capital there are two types of dependences of weighted average cost of capital, WACC, on the company age n: monotonic decrease with n and decrease with passage through minimum, followed by a limited growth. In practice, there are companies with both types of dependences of WACC on the company age n.

In this chapter, we investigate which companies have the “golden age,” i.e., obey the latter type of dependence of WACC on n (Brusov, New meaningful effects in modern capital structure theory. J Rev Global Econ 7:104–122. SCOPUS, 2018b). With this aim we study the dependence of WACC on the age of company n at various leverage levels within the wide spectrum of capital cost values as well as the dependence of WACC on leverage level L at fixed company age n. All calculations have been done within modern theory of capital cost and capital structure BFO by Brusov–Filatova–Orekhova (Brusov et al. 2011a, b, c, d, e, 2012a, b, 2013a, b, c, 2014a, b; Filatova et al., Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite life–time company. Bull FU 48:68–77, 2008). We have shown that existence of the “golden age” of the company does not depend on the value of capital costs of the company, but depends on the difference between equity k₀ and debt k_d costs. The “golden age” of the company exists at small enough difference between k₀ and k_d costs, while at high value of this difference the “golden age” of the company is absent: curve WACC(n) monotonically decreases with n. For the companies with the “golden age” curve WACC(L) for perpetuity companies lies between curves WACC(L) for company ages n = 1 and n = 3, while for the companies without the “golden age” curve WACC(L) for perpetuity companies is the lowest one.

In our paper (Brusov et al. 2015), we have also found a third type of WACC(n) dependence: decrease with passage through minimum, which lies below the perpetuity limit value, then going through maximum followed by a limited decrease. We called this effect “Kulik effect.” In this chapter, we have found a type of “Kulik effect”: decrease with passage through minimum of WACC, which lies above the perpetuity limit value, then going through maximum followed by a limited decrease. We call this company age, where WACC has a minimum, which lies above the perpetuity limit value, “a silver age” of the company.

Because the cost of attracting capital is used in rating methodologies as discounting rate under discounting of cash flows, study of WACC behavior is very important for rating procedures. Taking account of effects of the “golden (silver) age” could change the valuation of creditworthiness of issuers.

Note that, since the “golden age” of the company depends on the company’s capital costs, by controlling them (e.g., by modifying the value of dividend payments, which reflect the equity cost), company may extend the “golden age” of the company, when the cost to attract capital becomes minimal (less than perpetuity limit), and capitalization of companies becomes maximal (above than perpetuity assessment) up to a specified time interval. We discuss the use of discovered effects in finance, in economics, and, in particular, in rating methodologies.