Home  Journals  Finance and Credit  31(655) - 2015 August

A comparative analysis of financial performance of companies within the modern theory of capital cost and capital structure by Brusov-Filatova-Orekhova (BFO theory)

Vol. 21, Iss. 31, AUGUST 2015

Article PDF Version

Received: 2 April 2015

Accepted: 28 April 2015

Available online: 31 August 2015

Subject Heading: BUSINESS VALUE

JEL Classification: 

Pages: 46-59

Importance We examine the dependence of the cost of capital (Weighted Average Cost of Capital, WACC) on the leverage level (L), company life (n) and corporate income tax (t) for companies of arbitrary age (n) that continue operating in the market, as well as for those retreated from the market.
     Objectives The aim of the study is to make a comparative analysis of the cost of capital for companies of arbitrary age n, both operating in the market and those that exited the market.
     Methods All calculations are made within the modern theory of capital cost and capital structure by Brusov-Filatova-Orekhova (BFO). We investigate the dependence at different values of the cost of capital (equity, k₀ and debt, k_d).
     Results The comparative analysis shows that for companies that have exited the market, the BFO theory requires amendments, which we made in the course of the study.
     Conclusions It is possible to estimate the cost of capital (WACC) for companies that retreated from the market (and no longer exist) within the BFO theory as amended and adapted to the case. WACC for companies that ceased to exist is always higher than that of the companies that continue operating in the market (with the same parameters, i.e. leverage level L, company's life (or age) n, corporate income tax t, and capital cost (equity and debt).

Keywords: capital cost, company age, leverage level, Brusov-Filatova-Orekhova theory, Modigliani-Miller theory

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