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2018 | OriginalPaper | Buchkapitel

12. Influence of Debt Financing on the Efficiency of Investment Projects: The Analysis of Efficiency of Investment Projects Within the Perpetuity (Modigliani–Miller) Approximation

verfasst von : Peter Brusov, Tatiana Filatova, Natali Orekhova, Mukhadin Eskindarov

Erschienen in: Modern Corporate Finance, Investments, Taxation and Ratings

Verlag: Springer International Publishing

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Abstract

In this chapter, we conduct the analysis of effectiveness of investment projects within the perpetuity (Modigliani–Miller) approximation (Мodigliani and Мiller, Am Econ Rev 48:261–297, 1958, Am Econ Rev 53:147–175, 1963, Am Econ Rev 56:333–391, 1966). Based on the obtained in previous chapter results for NPV (Brusov and Filatova, Finance Credit 435:2–8, 2011; Brusov et al., Appl Financ Econ 21:815–824, 2011a, Res J Econ Bus ICT 2:16–21, 2011b, Res J Econ Bus ICT (UK) 2:11–15, 2011c, Appl Financ Econ 22:1043–1052, 2012a, J Rev Global Econ 1:106–111, 2012b, J Rev Global Econ 2:94–116, 2013a, J Rev Global Econ 2:183–193, 2013b, Cogent Econ Finance 2:1–13, 2014a, J Rev Global Econ 3:175–185, 2014b; Filatova et al., Bull FU 48:68–77, 2008; Brusova, Financ Anal Prob Sol 34:36–42, 2011), we analyze the effectiveness of investment projects for three cases:

At a constant difference between equity cost (at L = 0) and debt cost Δk = k ₀ − k _d

At a constant equity cost (at L = 0) and varying debt cost k _d

At a constant debt cost k _d and varying equity cost (at L = 0) k ₀

The dependence of NPV on investment value and/or equity value will be also analyzed. The results are shown in the form of tables and graphs.

It should be noted that the obtained tables have played an important practical role in determining the optimal or acceptable debt level, at which the project remains effective. There is an optimal debt level for the situation, when in the dependence of NPV on leverage level L there is an optimum (leverage level value, at which NPV reaches a maximum value). There is an acceptable debt level for the situation, when NPV decreases monotonically with leverage. And, finally, it is possible that NPV is growing with leverage. In this case, an increase in borrowing leads to increased effectiveness of investment projects, and their limit is determined by financial sustainability of investing company.

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Vorheriges Kapitel Investment Models with Debt Repayment at the End of the Project and Their Application

Nächstes Kapitel The Analysis of the Exploration of Efficiency of Investment Projects of Arbitrary Duration (Within Brusov–Filatova–Orekhova Theory)

Brusova A (2011) А comparison of the three methods of estimation of weighted average cost of capital and equity cost of company. Financ Anal Prob Sol 34(76):36–42

Brusov PN, Filatova ТV (2011) From Modigliani–Miller to general theory of capital cost and capital structure of the company. Finance and Credit 435:2–8

Brusov P, Filatova T, Orehova N, Brusova A (2011a) Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite life–time company. Appl Financ Econ 21(11):815–824CrossRef

Brusov P, Filatova T, Orehova N et al (2011b) From Modigliani–Miller to general theory of capital cost and capital structure of the company. Res J Econ Bus ICT 2:16–21

Brusov P, Filatova T, Orehova N et al (2011c) Influence of debt financing on the effectiveness of the investment project within the Modigliani–Miller theory. Res J Econ Bus ICT (UK) 2:11–15

Brusov P, Filatova T, Eskindarov M, Orehova N (2012a) Influence of debt financing on the effectiveness of the finite duration investment project. Appl Financ Econ 22(13):1043–1052CrossRef

Brusov P, Filatova T, Eskindarov M, Orehova N (2012b) Hidden global causes of the global financial crisis. J Rev Global Econ 1:106–111

Brusov P, Filatova P, Orekhova N (2013a) Absence of an optimal capital structure in the famous tradeoff theory! J Rev Global Econ 2:94–116

Brusov P, Filatova T, Orehova N (2013b) A qualitatively new effect in corporative finance: abnormal dependence of cost of equity of company on leverage. J Rev Global Econ 2:183–193

Brusov P, Filatova P, Orekhova N (2014a) Mechanism of formation of the company optimal capital structure, different from suggested by trade off theory. Cogent Econ Finance 2:1–13. https://doi.org/10.1080/23322039.2014.946150 CrossRef

Brusov P, Filatova T, Orehova N (2014b) Inflation in Brusov–Filatova–Orekhova theory and in its perpetuity limit – Modigliani – Miller theory. J Rev Global Econ 3:175–185CrossRef

Brusov P, Filatova T, Orehova N, Eskindarov M (2015) Modern corporate finance, investment and taxation, 1st edn. Springer, Berlin, pp 1–368CrossRef

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Brusov P, Filatova T, Orehova N, Kulk V (2018b) A “golden age” of the companies: conditions of its existence. J Rev Global Econ 7:88–103CrossRef

Brusov P, Filatova T, Orehova N, Kulk V (2018c) Rating methodology: new look and new horizons. J Rev Global Econ 7:63–87CrossRef

Brusov P, Filatova T, Orehova N, Kulk V (2018d) Rating: new approach. J Rev Global Econ 7:37–62CrossRef

Filatova Т, Orehova N, Brusova А (2008) Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite life–time company. Bull FU 48:68–77

Мodigliani F, Мiller M (1958) The cost of capital, corporate finance, and the theory of investment. Am Econ Rev 48:261–297

Мodigliani F, Мiller M (1963) Corporate income taxes and the cost of capital: a correction. Am Econ Rev 53:147–175

Мodigliani F, Мiller M (1966) Some estimates of the cost of capital to the electric utility industry 1954–1957. Am Econ Rev 56:333–391

Titel: Influence of Debt Financing on the Efficiency of Investment Projects: The Analysis of Efficiency of Investment Projects Within the Perpetuity (Modigliani–Miller) Approximation
verfasst von: Peter Brusov
Tatiana Filatova
Natali Orekhova
Mukhadin Eskindarov
Verlag: Springer International Publishing
Buch: Modern Corporate Finance, Investments, Taxation and Ratings
Print ISBN: 978-3-319-99685-1

Electronic ISBN: 978-3-319-99686-8

Copyright-Jahr: 2018
DOI: https://doi.org/10.1007/978-3-319-99686-8_12