4. Modification of the Modigliani–Miller Theory for the Case of Advance Tax on Profit Payments

The Modigliani–Miller theory, discussed in Chap. 3, has a lot of limitations. One of the most important and serious assumptions of the Modigliani–Miller theory is that all financial flows as well as all companies are perpetuity. This limitation was removed by Brusov–Filatova–Orekhova in 2008 (Filatova et al., Bull FU 48:68–77, 2008), who have created BFO theory—the modern theory of capital cost and capital structure for companies of arbitrary age. Despite the fact that the Modigliani–Miller theory is currently a particular case of the general theory of capital cost and capital structure—Brusov–Filatova–Orekhova (BFO) theory—it is still widely used in the West.

In this chapter, we discuss one more limitation of Modigliani–Miller theory: a method of tax on profit payments. Modigliani–Miller theory considers these payments as annuity-immediate while in practice these payments are made in advance and thus should be considered as annuity-due. We generalize the Modigliani–Miller theory for the case of advance tax on profit payments, which is widely used in practice, and show that this leads to some important consequences, which change seriously all the main statements by Modigliani and Miller (Brusov et al., J Rev Global Econ 9:257–268, 2020). The modified Modigliani–Miller theory (MMM theory) is the second of the three main theories which consists of the basis for conducting the modification of existing rating methodologies. In this chapter, we describe in short the main results of MMM theory.