Abstract
In Chaps.
14,
15,
16,
17, and
18, we describe new meaningful effects in the modern capital structure theory (BFO theory), which should be accounted in rating methodologies.
In this and the next chapter, we conduct a complete study of the effects we have discovered: the “golden” and “silver” age of the company and their conditions of existence. The effects of the “golden” and “silver” age of the company are that at a certain age of the company WACC value is lower than in the perpetuity limit of the BFO theory—Modigliani–Miller theory, and the company’s capitalization, V, is greater than capitalization, V, in the theory of Modigliani–Miller. These effects should be considered when generating ratings. Since the cost of raising capital is used (should be used) in rating methodologies as the discount rate for discounting cash flows, the study of the dependence of WACC on the age of the company is very important for assessment procedures in rating and business valuation. Taking into account the effects of the company’s “golden” and “silver” age can significantly change the credit rating of issuers. We study the dependence of the cost of raising capital on the age of the company n at various leverage levels and at different values of the equity and debt costs in order to determine the minimum cost of raising capital of the company. All calculations were performed within the framework of the modern theory of capital cost and capital structure by Brusov–Filatova–Orekhova (BFO theory). We study the dependence of the weighted average cost of capital of a company, WACC, on the company age n at various leverage levels L and at various values of the cost of capital (equity and debt).
It has been shown for the first time that the average weighted cost of capital of a company, WACC, in the theory of Modigliani–Miller (MM) is not minimal, and the estimate of Modigliani–Miller’s capitalization of a company is not maximum, as all financiers have assumed: at some stage in the development of a company, the WACC turns out to be lower than Modigliani–Miller estimates, and company capitalization, V, turns out to be higher than V estimates in the Modigliani–Miller theory.
This and the following chapters conclude that the notions of the results of the Modigliani–Miller theory existing in these aspects turn out to be incorrect. The possibilities of using discovered effects in practice are discussed, in particular, when rating non-financial issuers.