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2021 | OriginalPaper | Chapter

8. Application of Brusov–Filatova–Orekhova Theory (BFO Theory) in Rating Methodology

Authors : Peter Brusov, Tatiana Filatova, Natali Orekhova

Published in: Ratings

Publisher: Springer International Publishing

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Abstract

In Chaps. 6 and 7, a new approach to rating methodology has been suggested. The key factors of the new approach were the following: (1) The adequate use of discounting of financial flows virtually not used in existing rating methodologies and (2) the incorporation of rating parameters (financial “ratios”) into the perpetuity limit of modern theory of capital structure (Brusov–Filatova–Orekhova (BFO) theory): for companies with infinite lifetime.

In this chapter, further development of the new approach has been done. We have generalized it for the general case of modern theory of capital structure (Brusov–Filatova–Orekhova (BFO) theory): for companies of arbitrary age. A serious modification of the BFO theory in order to use it in rating procedure is required. It allows us to apply obtained results for real economics, where all companies have finite lifetime, introduce a factor of time into theory, estimate the creditworthiness of companies of arbitrary age (or arbitrary lifetime), introduce discounting of the financial flows, using the correct discount rate, etc. This allows us to use the powerful tools of the BFO theory in the rating. All these create a new base for rating methodologies.

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Title: Application of Brusov–Filatova–Orekhova Theory (BFO Theory) in Rating Methodology
Authors: Peter Brusov
Tatiana Filatova
Natali Orekhova
Publisher: Springer International Publishing
Book: Ratings
Print ISBN: 978-3-030-56242-7

Electronic ISBN: 978-3-030-56243-4

Copyright Year: 2021
DOI: https://doi.org/10.1007/978-3-030-56243-4_8